According to a an article in The Guardian, The best news in the world, by the president of the World Bank, Jim Yong Kim, there has been a dramatic fall in global poverty over the past two decades. The number of people in extreme poverty is projected to fall this year to below 10% of global population for the first time. This has been made possible, he claims, by unprecedented economic growth, especially in China.
But this raises three questions.
The first is whether, in the face of falling growth rates, progress in poverty reduction can be maintained.
The second is whether the World Bank is measuring extreme poverty in the right way. It is now defined as living on less than US$1.90 a day in 2011 prices – until a few weeks ago is was $1.25 in 2005 prices. As a result of this rebasing, global poverty falls from 14.5% of the world’s population (or 1011 million people) under the old method to 14.2% (or 987 million) under the new.
The third question is whether countries can improve their data collection so that a truer estimate of poverty can be made.
As far as the first question is concerned, Kim states that to stimulate growth, ‘every dollar of public spending should be scrutinised for impact. Every effort must be made to improve productivity.’ What is more, three things must happen:
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Economic growth must lift all people. It must be inclusive. |
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Investment in human beings is crucial – especially investing in their health and education. Malnourished and poorly educated children will never reach their full potential and countries, in turn, will fall short of their economic and social aspirations. |
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We must ensure that we can provide safety nets that prevent people from falling back into poverty because of poor health, economic shocks, or natural disasters. |
As far as the second question is concerned, there are many who argue that $1.90 per day is far too low a measure of the extreme poverty threshold. It is a purchasing-power parity measure and is equivalent to what $1.90 would buy in the USA in 2011. 
But, according to the Jason Hickel article linked below, ‘the US Department of Agriculture calculates that in 2011 the very minimum necessary to buy sufficient food was $5.04 per day. And that’s not taking account of other requirements for survival, such as shelter and clothing.’ Peter Edward of Newcastle University, claims Hickell, ‘calculates that in order to achieve normal human life expectancy of just over 70 years, people need roughly 2.7 to 3.9 times the existing poverty line.’
But even if living on below $1.90 a day is defined as extreme poverty, it is important not to see the problem of poverty as having been solved for people who manage to achieve an income slightly above that level.
The third question is how to improve data. There is a paucity and unreliability of data in many developing countries. According to Kim:
Our report adds that data is sparse and inconsistent across the region and globally. Some 29 countries around the world had no poverty data from 2002 to 2011, so they could not track their progress. Another 28 had just one survey that collected poverty data during that time.
This is a situation that must change to improve the world’s ability to tackle poverty. In fact, we can’t accomplish our goal if we do not have enough information to know whether people are actually lifting themselves out of poverty. For that we need to address huge data gaps. We need robust data.
Articles
The best news in the world: we have made real progress towards ending extreme poverty The Guardian, Jim Yong Kim (3/11/15)
Could you live on $1.90 a day? That’s the international poverty line The Guardian, Jason Hickel (1/11/15)
Making international trade work for the world’s poorest The Guardian, Jim Yong Kim and Roberto Azevêdo (30/6/15)
Global Poverty Will Hit New Low This Year, World Bank Says Huffington Post, Lydia O’Connor (23/10/15)
The international poverty line has just been raised to $1.90 a day, but global poverty is basically unchanged. How is that even possible? World Bank blogs, Francisco Ferreira, Dean Mitchell Jolliffe and Espen Beer Prydz (4/10/2015)
Why Didn’t the World Bank Make Reducing Inequality One of Its Goals? World Bank blogs, Jaime Saavedra-Chanduvi (23/9/13)
$1.90 Per Day: What Does it Say? Institute for New Economic Thinking, Rahul Lahoti and Sanjay Reddy (6/10/15)
Reports and papers
The Role of Trade in Ending Poverty WTO and World Bank (2015)
Poverty in a Rising Africa World Bank (1/10/15)
Ending extreme poverty and sharing prosperity: progress and policies World Bank, Marcio Cruz, James Foster, Bryce Quillin and Philip Schellekens (October 2015)
Questions
- Explain how the World Bank calculates the extreme poverty line.
- Why, if the line has risen from $1.25 per day to $1.90 per day, has the number of people recorded as being in extreme poverty fallen as a result?
- Why has the number of people in extreme poverty been rising over the years and yet the percentage of people in extreme poverty been falling?
- What policies can be adopted to tackle poverty? Discuss their practicality?
- Are reduced poverty and increased economic growth consistent policy goals? (See the blog post Inequality and economic growth.)
- What are the inadequacies of using income per day (albeit in ppp terms) as a measure of the degree of poverty? What other indicators of poverty could be used and how suitable would they be?
- How could international trade be made to work for the world’s poorest?
Mario Draghi, the ECB President, has indicated that the ECB is prepared to engage in further monetary stimulus. This is because of continuing weaknesses in the global economy and in particular in emerging markets.
Although the ECB at its meeting in Malta on 22 October decided to keep both interest rates and asset purchases (€60 billion per month) at current levels, Mario Draghi stated at the press conference that, at its next meeting on December 3rd, the ECB would be prepared to cut interest rates and re-examine the size, composition and duration of its quantitative easing programme. He stopped short, however, of saying that interest rates would definitely be cut or quantitative easing definitely increased. He said the following:
“The Governing Council has been closely monitoring incoming information since our meeting in early September. While euro area domestic demand remains resilient, concerns over growth prospects in emerging markets and possible repercussions for the economy from developments in financial and commodity markets continue to signal downside risks to the outlook for growth and inflation. Most notably, the strength and persistence of the factors that are currently 
slowing the return of inflation to levels below, but close to, 2% in the medium term require thorough analysis.
In this context, the degree of monetary policy accommodation will need to be re-examined at our December monetary policy meeting, when the new Eurosystem staff macroeconomic projections will be available. The Governing Council is willing and able to act by using all the instruments available within its mandate if warranted in order to maintain an appropriate degree of monetary accommodation.”
Mario Draghi also argued that monetary policy should be supported by fiscal policy and structural policies (mirroring Japan’s three arrows). Structural policies should include actions to improve the business environment, including the provision of an adequate public infrastructure. This is vital to “increase productive investment, boost job creation and raise productivity”.
As far as fiscal policies are concerned, these “should support the economic recovery, while remaining in compliance with the EU’s fiscal rules”. In other words, fiscal policy should be expansionary, while staying within the limits set by the Stability and Growth Pact.
His words had immediate effects in markets. Eurozone government bond yields dropped to record lows and the euro depreciated 3% against the US dollar over the following 24 hours.
Webcasts
ECB Press Conference on YouTube, Mario Draghi (22/10/15)
Draghi reloads bazooka FT Markets, Ferdinando Guigliano (22/10/15)
Articles
Mario Draghi: ECB prepared to cut interest rates and expand QE The Guardian, Heather Stewart (22/10/15)
Draghi signals ECB ready to extend QE Financial Times, Claire Jones and Elaine Moore (22/10/15)
Dovish Mario Draghi sends bond yields to new lows Financial Times, Katie Martin (23/10/15)
What Draghi Said on QE, Policy Outlook, Global Risks and Inflation Bloomberg, Deborah Hyde (22/10/15)
ECB set to ‘re-examine’ stimulus policy at next meeting BBC News (22/10/15)
The global economy warrants a big dose of caution The Guardian, Larry Elliott (25/10/15)
ECB Press Conference
Introductory statement to the press conference (with Q&A) ECB, Mario Draghi (President of the ECB), Vítor Constâncio (Vice-President of the ECB) (22/10/15)
Questions
- Why is the ECB considering further expansionary monetary policy?
- What monetary measures can a central bank use to stimulate aggregate demand?
- Explain the effects of Mario Draghi’s announcement on bond and foreign exchange markets.
- What are the objectives of ECB monetary policy according to the its mandate?
- Should the ECB consider using quantitative easing to provide direct funding for infrastructure projects?
- What constraints does the EU’s Stability and Growth Pact impose on eurozone countries?
- What are the arguments for and against (a) the Bank of England and (b) the US Federal Reserve engaging in further QE?
- If the ECB does engage in an expanded QE programme, what will determine its effectiveness?
The second largest economy in the world, with a record expansion to its current economic status: China. With a phenomenal population, massive migration to the cities and incredible infrastructure development, China has fast become a key economic player, with environmental and pollution problems to match.
The price of China’s economic development may be too high for some people. Increases in incomes, growth and employment may be good news, but is the cost too high? Do economic growth and progress mean poor health and if so, is this a price worth paying
Another big topic within China is the impact on inequality. With growth accelerating in urban areas, population movement from the rural to the urban has been a common feature across China, but this has also created greater inequality. This population movement has separated families and played a role in creating barriers of access to health and education.
The following article from the BBC considers a range of indicators within China and you may also want to review some earlier blog postings on the Sloman News Site which analyse the Chinese economy.
Cement and pig consumption reveal China’s huge changes BBC News (21/9/15)
Questions
- What are the key drivers of China’s development?
- What are the costs and benefits of rural-urban migration?
- To what extent do you think there may be a trade-off between quality and quantity when it comes to infrastructure projects? Or is Chinese labour simply more efficient relative to countries such as the UK?
- How should we measure economic development? If access to education and health care is limited in the more rural areas, but widely available in the larger cities, does this suggest a country that is developing?
- What are the main externalities that China must tackle? Are they domestic issues or global ones? What about the solutions?
- If a key driver of Chinese growth and development is government investment in infrastructure projects, is this true and sustainable growth or do you think it might slowly disappear if the government doesn’t continue to invest?
- Do you think the relative success of China can be replicated in other emerging nations and in particular in nations within Africa?
The UK’s balance on trade continues to be sharply in deficit. At the same time, both manufacturing and overall production are still well below their pre-crisis levels. What is more, with a sterling exchange rate that has appreciated substantially over recent months, UK exports are at an increasing price disadvantage. The hoped-for re-balancing of the economy from debt-financed consumption to investment and exports has not occurred. Investment in the UK remains low relative to that in other major economies (see).
But other developments in the global economy are working in the UK’s favour.
Manufacturing globally is becoming more capital intensive, which reduces the comparative advantage of developing countries with low labour costs.
At the same time, the dividing line between manufacturing and services is becoming more blurred. Manufacturers in developing countries may still produce parts, such as chips or engines, but the design, marketing and sales of the products may take place in developed countries, such as the UK. Indeed, as products become more sophisticated, an increasing amount of value added may occur in developed countries.
The UK may be particularly well-placed in this regard. It can provide many high-end services in IT, business support and financial services to international manufacturers. It may have a comparative advantage in idea-intensive production.
Finally with a higher exchange rate, the UK’s terms of trade have been improving. The downside is that it makes UK exports more expensive in foreign currency terms, but it also makes commodity prices cheaper, which have already fallen in dollar terms, and also the prices of imported component parts. This helps offset the effect of the appreciation of the exchange rate on exports.
The following article by Jeremy Warner considers whether, despite its poor performance in traditional manufacturing, the UK might have hit an economic ‘sweet spot’ in its trade position.
Article
Unbalanced but lucky, Britain hits an economic sweet spot The Telegraph, Jeremy Warner (8/9/15)
Data
UK Trade (Excel file) ONS (9/9/15)
(See, for example, Worksheet 1. You can search for longer series using Google advanced search, putting www.ons.gov.uk in the ‘site or domaine’ box and searching for a particular series, using the series identifier found at the top of each column in the Excel file, such as BOKI for balance on trade in goods.)
Exchange rate data Bank of England Statistical Interactive Database
Questions
- Explain the difference between the balance on trade, the balance on trade in goods and the balance of payments on current account.
- Why has the UK not experienced a re-balancing of the economy as hope for by the Chancellor of the Exchequer, amongst others?
- What is meant by the ‘terms of trade’?
- What would cause an ‘improvement’ in the terms of trade?
- Are the UK’s terms of trade likely to move in the UK’s favour in the coming months? Explain.
- What current factors are mitigating against a recovery of UK manufacturing exports?
- Is de-industrialisation necessarily a ‘bad thing’?
- Does the development of new capital-intensive technologies in manufacturing mean that the UK could become a net exporter of manufactures? Explain why or why not.
China has a key role in the global economy. Recording double digit growth for a number of years and posting impressive export figures, China’s has been an economy on an upward trajectory. But its growth has been slowing and this might spell trouble for the global economy, as was discussed in the following blog. For many, China is the pendulum and the direction it moves in will have a big influence on many other countries.
There are some suggestions that China’s rapid growth has been somewhat artificial, in particular following the financial crisis, where we saw massive investment by state-owner enterprises, banks and local government. This has led to a severe imbalance within the Chinese economy, with high levels of debt. One of the key factors that has enabled China to grow so quickly has been strong exports. China has typically had a large current account surplus, often balanced by large current account deficits in many Western countries.
The exchange rate is a key component in keeping strong export growth and the devaluation of the Chinese currency in August (see What a devalued yuan means to the rest of the world) is perhaps a suggestion that export growth in China is lower than desired. Devaluing the currency will boost the competitiveness of Chinese exports and this in turn may lead to a growth in the current account surplus, which had fallen quite significantly from around 10% to 2%.
The problem is that China is currently imbalanced and this is likely to create problems around the world. With globalisation, the free movement of capital and people, deflation in the West and falling world asset prices, the situation in China is crucial. Although you will find many articles about China and blogs on this site about its devaluation, its growth and policy, the BBC News article below considers the conflicts that exist between three key economic objectives:
1. currency stability
2. the free movement of capital
3. independent monetary policy
and the need for some international co-operation and co-ordination to enable China’s economy to return to internal and external balance.
China’s impossible trinity BBC News, Duncan Weldon (8/9/15)
Questions
- What is meant by internal balance?
- What is external balance?
- Would you suggest that China is suffering from an imbalanced economy? If so, which type of imbalance and why is this a problem for China and for the world economy?
- The article refers to the trilemma. Why can an country not achieve all 3 parts of the trilemma? You should explain why each combination of 2 aspects is possible, but why the third is problematic.
- Use a diagram to explain why a fall in the exchange rate will boost the competitiveness of exports and why this can create economic growth.
- Why is a devalued Chinese currency bad news for the rest of the world?
- How could international co-operation and co-ordination help China?
According to a an article in The Guardian, The best news in the world, by the president of the World Bank, Jim Yong Kim, there has been a dramatic fall in global poverty over the past two decades. The number of people in extreme poverty is projected to fall this year to below 10% of global population for the first time. This has been made possible, he claims, by unprecedented economic growth, especially in China.
But, according to the Jason Hickel article linked below, ‘the US Department of Agriculture calculates that in 2011 the very minimum necessary to buy sufficient food was $5.04 per day. And that’s not taking account of other requirements for survival, such as shelter and clothing.’ Peter Edward of Newcastle University, claims Hickell, ‘calculates that in order to achieve normal human life expectancy of just over 70 years, people need roughly 2.7 to 3.9 times the existing poverty line.’
