May 6, 2009 Professor Vesa Kanniainen Department of Economics University of Helsinki

1. Trade or Aid in Policies Towads Poverty.Unu-Wider Seminar on Developing Countries and the Global Downturn – The Way Forward,In Collaboration With Think Tank e2 May 6, 2009 Professor Vesa Kanniainen Department of Economics University of Helsinki

2. Major development trends in the world economy 1980- • Asian countries started to catch up • Significant development in the Latin American countries • Resource-rich countries accumulated substantial surplusses (especially towards the end of the period) • Many African countries did not follow the lead • Poverty in Asia and Africa remained large.

3. Facts on World Poverty (figures from 2001-2002, not up-dated) • 4.6 billion people live in developing countries • More than 800 million do not have access to sufficient food • More than 850 million are illiterate • Almost a billion have not access to crean water • The access to basic health limited to 2.4 billion people • More than 300 million boys and girls do not go to school • 11 million children die every year • 1.2 billion live with an income of less than 1$/day

4. Measuring Poverty • Bourguignon, F. and Morrisson, C., “Inequality Among World Citizens: 1820-1992”, American Economic Review, 92, 2002, 727-44. • Deaton, A. “Measuring Poverty in a Growing World (Or Measuring Growth in a Poor World), NBER WP. 9822. • Dollar, D. and A. Kraay, ”Trade, Growth, and Poverty”, Development Research Group, The World Bank, presented at the Wider conference on economic growth and poverty reduction, Helsinki, May 25-26, 2001. • Harrison, Ann (ed.): Globalization and Poverty, summary NBER WP No. 12347.

5. Ravillion, M., ”Measuring Aggregate Welfare in Developing Countries: How Well Do National Accounts and Surveys Agree?”, World Bank, August 2001. • Jeffrey Suchs: The End of Poverty (Foreword by Bono), 2005. • Sala-I-Martin, X, 2002, “The Disturbing ‘Rise’ of Global Income Inequality, NBER Working Paper Series, 8904. • William Easterly, The White Man’s Burden. Why the west’s efforts to aid the rest have done so much ill and so little good, New York, 2006.

6. Bourguignon, F. and Morrisson, C.,:Some Results • Measurement problems: momentary income differences or differences in life time incomes? • Income differences or consumption possibilites? • Using the length of a life time? Results: • Inequality increased during the 19th century up to the 2nd world war (gini coefficient, Theil index) • From 1950 up to 2002 the income inequality did not increase

7. Concern: concentration of poverty in certain areas! • Using life-time incomes instead of momentary incomes shown that the year 1950 has been a turning point: the world inequality has been reduced since 1950 • The expected life time in the world doubled between 1820 and 2002 (from 26 to 60 years) – child mortality!

8. Deaton • Estimates based on income accounts suggest a greater growth than household surveys • Poverty measures have declined at a lower rate than the growth rates suggest • Reasons: (i) rich households do not show up in the surveys (ii) income accounting figures suggest too favorable estimates because they include consumption goods which poor people do not consume

9. Deaton’s conclusions (i) Statictical approaches underestimate the reduction in poverty but overestimate the growth rate of the world economy (ii) Against Kuznets’ hypothesis, the start-up phase of growth does not lead to an increase in the inequality: growth is good also for the poor people (iii) The rapid growth in the world economy has reduced world poverty => It is important to separate countries which participated in the globalization process and those which have not participated

10. Dollar and Kraay • More than 50 % of people in developing countries live in countries which participated in the globalization process • Countries which participated in the globalization process: the growth rate accelerated from 2.9 % (1970s) to 3.5 % (1980s) to 5 % (1990s) • Rich countries and countries which did not participate in the globalization process: the growth rates fell (in the latter group from 3.5 % (1970s) to 0.8 % (1980s) to 1.4 % (1990s)) • The income inequality has not increased (there are exception, mostly in the former socialistic countries)

11. Sala-i-Martin: ’relative’ poverty halved in 1980-1998 • The share of people living with 1$ per day is reduced from 20 % to 5 % • The share of people living with 2$ epr day is reduced from 44 % to 18 % in 20 years • Global inequality is reduced according to all indicators Note. I use the term ”relative poverty” in an unconventional way (it more ofter refers to people with incomes less than 50 % or 60 % of the household median income)

12. Absolute poverty not reduced • According to the World Bank, the absolute poverty is not reduced: with incomes less than 2$ per day there are 1.3 billion people • Explanation: the world population has grown • Distribution of poverty (World Bank): • South Asia 37 % • East Asia 32 % • Africa south of Sahara 15 % • South America and the Karibeans 8 % • South-East Asia and the Pasific 7 % • Arab countries 1 %

13. Updated results: Chen & Ravallion (World Bank) • 1981-2005, poverty has been 400 million bigger than thought earlier • Poverty is declining fast • In 25 year, the absolute number of poor has declined by 500 million people • In 1981, half of people were poor in the world, 25 % in 2005: poverty halved • The definition of the poverty limit raised from 1 $ up to 1,25 $ daily income • In East Asia, the poorest used to make up 80 % of the total population, in 2005 only 18 % • In South Asia, the decline was from 60 to 40 %. • In Africa south of Sahara the situation is worst; the poor make up 50 % of the population and an increase in the population has doubled their amount up to 380 million. • The target: halving the poverty from 1991-2015 is feasible!

14. Free trade and the principle of comparative advantage • For those with economic training, it is clear that free trade is the most important principle towards economic progress and an increase in incomes • Other necessary ingredients: • Availability of public goods (= stable conditions) • Establishment of property rights (ownership right to the outcome of an economic success => incentives) • Esistence of markets • Innovations • (Right type of) social capital

15. How does the comparative advantage work? Example: • A farther and his son plan to build up cottage for the son. Their welfare is evaluated according to the time needed to build. • Farther has the absolute advantage in all tasks: he is faster and more competent than the son in all tasks needed. • Yet, it makes sense to allocate some tasks to the son (say, like carrying some materials). Why? • Explanation: the welfare of the team is increased if the son undertakes some tasks because the valuable time of the farther can then be saved (opportunity cost).

16. Chinese farmers • Millions of Chinese farmers have moved to work in western susidiaries at a low pay and in conditions which appear non-human to western people. This does not appear as a blessing. • Explanation: they would be even worse-off on their own farm. • Blessing of globalisation: factor prices (adjusted for the productivity) tend to be equalized across countries. Warning: do not expect over-night effects. The processes are very very slow. (But watch what happened to the wage gap between Finland and Estonia before the current crisis!).

17. Easterly, ”The White Man’s Burden”: Arguments • Over the part 50 years, the western aid to development has been 2300 billion $ (billion = mrd) • Development aid has produced very little good and very much bad • Additional development aid is not advisable before the development idea has been re-examined

18. Asian economic miracle – can Africa follow the lead? • Products and innovations manufactured in Asia during the most recent globalization process were all from the west • The fast development of Asian countries was not based on development aid but on globalization (free mobility of western enterprises to their territories with low cost of production) • Subsequent local entrepreneurship: China has respected the right of its entrepreneurs to the entrepreneurial income and property (Russia has not, Zimbabwe has not). • The Chinese government has followed the principles of the British kings of the 1600th century during the War of Roses: ”It is better to tax than to terminate the ownership” • When does Africa obtain its first plant for Nokia products?

19. Morality: Why do we care of Africa? Hypotheses: (i) We are good people and good people want to help? (ii) We have bad conscience because of the slavery in the part? (iii) We have bad conscience because in the colonial time, the west draw the borders of the African countries articifially creating many problems for today (wars)? (iv) Without knowing it, we carry inside us the heritance of our ancestors living as hunter-garherers in small societies (of 150-2009 people with greater equity than in the today’s capitalistic word. The inheritance is so strong that it controls our moral sentiments even today?

20. (v) If we are moral, why do we critisize when western corporations move their units to the developing countries leaving their workers unemployed in the west?

21. Trade or Aid? • The answer is obvious: study the Asian success. • Thus, use aid to build infrastructure and schooling to attract foreign capital and subsidiaries.

22. Thank you