Is Capitalism Good for the Poor ?

1. Introduction: “What Is Poverty and Who Are the Poor? ” Is Capitalism Good for the Poor ?

2. 1 Billion People Live in “Extreme Poverty” World Bank 1,400,000,000 $1.25/day 1,000,000,000 $1.00/day World Bank 2010

3. Economic Terminology • Income • Wealth • GDP (Gross Domestic Product) • Per capita GDP Why do we use GDP to measure poverty?

4. Economic Terminology • Absolute Poverty – measured against a designated minimum threshold of material well-being. The incomes of the poor fall below the minimum threshold. • Current standard = $1/day PPP • Relative Poverty - identified by comparing levels of material well-being experienced by different individuals or groups, rather than by comparing the level of well-being to a standard.

5. Poverty Can Be Measured by EitherOutput(GDP) orConsumption Consumption Measure of Number of Poor by World Region

6. Countries of the World; Low, Middle and High Income

7. The number of extreme poor hasdeclined by 500 millionsince 1981

8. Share of World Population in Poverty, 1820 – 1998 ($1/day) World BankDavid Dollar, Development Research Group, World Bank. “Capitalism, Globalization and Poverty.”  unpublished paper, written for The Foundation for Teaching Economics, March, 2003, p. 27

9. Number of People Living on Less Than $1 Per Day, 1820 - 1998 1980 World BankDavid Dollar, Development Research Group, World Bank. “Capitalism, Globalization and Poverty.”  unpublished paper, written for The Foundation for Teaching Economics, March, 2003, p. 27

11. World Bank 2009

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13. Height Is a Proxy for Economic Well-Being

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15. Years of Life Expectancy at Birth Sources: Lee and Feng (1999); Peterson (1995); Wrigley and Schofield (1981, 529); World Resources Institute (2011); UNDP (2002) http://hdr.undp.org/statistics/data/indic/indic_1_1_1.html

16. Real Gross Domestic Product Per Capita (1990$ International PPP) Sources: Maddison (1998, 1999) Development Centre Studies The World Economy: Historical Statistics, Maddison, 2003.

17. Real Gross Domestic Product Per Capita (2005$ International PPP) Sources: Maddison (1998, 1999) Development Centre Studies The World Economy: Historical Statistics, Maddison, 2003.

18. The Good News and The Bad News Source: World Bank Poverty and Inequality Databasehttp://databank.worldbank.org/Data/Views/Reports/TableView.aspx (April 30, 2012)

19. David Dollar, Development Research Group, World Bank. “Capitalism, Globalization and Poverty.”  unpublished paper, written for The Foundation for Teaching Economics, March, 2003, p. 24.

20. What does Capitalism have to do with Poverty?

21. Measurement: Fraser Institute Economic Freedom: Size of government and taxation Protection of private property and the rule of law Soundness of money Trade regulation and tariffs Regulation of business, labor and capital markets 21

22. Background: Economic Freedom Project 25 year project Transparency is a highly valued part of the project Based entirely on third party data from World Bank, International Monetary Fund (IMF), Global Competitiveness Report, etc. (based on both objective and survey data) We rank 141 countries representing 95% of the world’s population according to the extent to which they permit their citizens to be economically free 22

23. Per Capita Income and Economic Freedom Quartile Most Free ……………. Least Free Sources: The Fraser Institute; The World Bank, World Development Indicators, 2011

24. Overall Economic Freedom Index: Top Ten Source: The Fraser Institute 2011.

25. Overall Economic Freedom Index: Bottom Ten Source: The Fraser Institute 2011.

26. Per Capita Income and Economic Freedom Quartile Most Free ……………. Least Free Sources: The Fraser Institute; The World Bank, World Development Indicators, 2011

27. Income Share of the Poorest 10% and Economic Freedom Most Free …………….. Least Free Sources: The Fraser Institute; The World Bank, World Development Indicators, 2011. 27

28. Income of the Poorest 10% and Economic Freedom Most Free ……………. Least Free Sources: The Fraser Institute; The World Bank, World Development Indicators, 2011.

29. Growth in Real GDP Per Capita (developing nations) and Economic Freedom Quartile Most Free ……………..…… Least Free Sources: The Fraser Institute; The World Bank, World Development Indicators, 2011. 29

30. Life Expectancy at Birth and Economic Freedom Quartiles Most Free ……………. Least Free Sources: The Fraser Institute; The World Bank, World Development Indicators, 2011. 30

31. Economic Freedom and Life Satisfaction Higher values indicate higher levels of satisfaction Most Free …………………. Least Free Sources: The Fraser Institute; New Economic Foundation (2009), The (un)Happy Planet Index 2.0. Why good lives don't have to cost the Earth. 31

32. EFW map 32

33. Economic Growth improves the lives of the poor by making the pie bigger Bigger “slices” mean higher standards of living

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35. Proposition: A nation’s institutions determine its ability to reduce poverty. Institutions: the formal and informal “rules of the game” that shape incentives and outline expected and acceptable forms of behavior in social interaction. • Private Property Rights • Rule of law • Open, competitive markets • Entrepreneurship and innovation

36. Proposition: A nation’s institutions determine its ability to reduce poverty. Institutions: the formal and informal “rules of the game” that shape incentives and outline expected and acceptable forms of behavior in social interaction. • Private Property Rights • Rule of law • Open, competitive markets • Entrepreneurship and innovation

37. Proposition: A nation’s institutions determine its ability to reduce poverty. Institutions: the formal and informal “rules of the game” that shape incentives and outline expected and acceptable forms of behavior in social interaction. • Private Property Rights • Rule of law • Open, competitive markets • Entrepreneurship and innovation

38. Property Rights Property Rights benefit the poor by making owned capital secure and productive. Lesson 2: “Property Rights and the Rule of Law”

39. Formal Legal Characteristics • Definable • Enforceable • Transferable

40. An Important Note • The term “Property Right” is shorthand for Human Rights. • The right to freely use and transfer possessions including yourself. • People, Not Property. • Recognition of people’s right of ownership to themselves and their labor.

41. Defined but not Enforced • A right that is defined but not enforced is useless. defending & enforcing Property Rights is paramount

42. Property Rights and Growth • Property Right holders have an incentive to preserve their property. • Owners consider the future. • Owners will improve a property. • The value of improvements reside with the owner.

43. Investment • Secure property rights make investment more likely. • Property Rights allow people to obtain debt. • Use of past and future incomes. • Collateralization is of greatest benefit to the poor.

44. Property Rights and the Poor • Property Rights are of the greatest benefit to the poor. • The rich can enforce rights over their property. • The poor cannot. • The definition and enforcement of Property Rights gives the poor the same right enjoyed by the rich. • Secure property rights also contribute to economic growth by enabling the poor to shift effort from protective to productive activities.

45. Enforcing the Rules • Rule of Force • Anarchy • Rule of Men • Laws are enforced at the good will of the enforcer. • Rule of Law • Both the governed and the governing are ruled by the same laws.

46. Big Picture • Rights to property promote economic growth by encouraging preservation, improvement and investment in owned resources. • In societies without clearly defined property rights the poor are disadvantaged because they lack the resources to enforce their rights.

47. Big Picture • To effectively stimulate economic growth property rights must exist within a society characterized by stable and predictable rules of law.

48. The Role of Competition Lesson 3: “Competition Opens Markets to the Poor”

49. To Compete or Not? The question is not whether we shall have competition, but what forms it will take. - Paul Heyne • Competition will always occur. • Scarcity • We cannot fulfill all our wants at no cost.

50. Non-Market Competition • What determines participation? • Connections • Wealth • Etc. • What determines production? • No effective production signals. • No effective incentives to innovate.