Politico reports here that a group of celebrities, including former Baptist pastor Mike Huckabee, shouted a four-letter obscenity for cameras in a promotion to speak up against famine. Bleeps and labels to cover mouths obscure the actual word.
In the PSA, our celebrity supporters shout out one four letter word that the majority of viewers will find offensive, in order to shine a light on something only a minority seems to be offended by. I know the tone is a bit rough for ONE — that’s no accident. If it feels like a punch in the face, then good — mission accomplished. It’s time for a wakeup call and here’s the alarm. Love it? Great. Hate it? OK. Just don’t ignore it.
I’m not sure I believe Huck did precisely as described.
Economic freedom and free trade need to be major pieces of the puzzle to solve this problem but President Obama and Bono do not get that.
Cato recently held a book launch for South African development expert Greg Mills (you can pre-order at Amazon). This is a very smart book by a man who has spent his professional life in the thick of the problem (bad governments making bad policy choices).
Economic growth does not require a secret formula. While countries from Asia to Latin America have emerged from poverty, Africa has failed to realize its potential in the 50 years since independence. Greg Mills, the former director of the South African Institute of International Affairs and one of South Africa’s most respected commentators, confronts the myths surrounding African development. He shows that African poverty was not caused by poor infrastructure, lack of market access or insufficient financial resources. Instead, the main reason Africans are poor is because their leaders have made bad policy choices. Please join us to hear why a growing number of African opinion makers and ordinary citizens believe that to emerge from poverty, Africa must embrace a far greater degree of political and economic freedom.
I recommend the podcast of the event (download MP3). Excellent comments by Marian L. Tupy, a policy analyst with the Center for Global Liberty and Prosperity.
One of my favorite development economists wrote the lead blurb
“Poverty is now optional” is Greg Mills’ invigorating message’, Paul Collier, Oxford University, Author of The Bottom Billion and The Plundered Planet
African poverty has been optional for fifty years — just keep in mind that the African elites do just fine under the status quo. And so do the NGOs, who effectively get a commission cut of the western aid budgets (as does the consulting industry housed around the DC beltway).
Good job Cato! Now, if we can just inject some sanity into the NGOs and OECD aid agencies. The billowing aid continues to insulate the African leaders from the consequences of their policies (and of course insulates them from their own populations).
On aid, I was pleased to hear Greg Mills respond to questions, with, paraphrasing:
Obama said his Africa policy was to “double the aid”. In fact that is a clear signal that there is no Africa policy. An effective, Africa policy is far more nuanced and complex than “double the aid”. What is the point of aid if you do not have tools for measuring the effectiveness of that aid?
While we are at it, let’s measure the effective of NGOs! I would be perfectly happy to have the organization that I run measured. Also, measure the effectiveness of consultants.
(…) The average age of African leaders is 75. The average age of Africans is 25. The numbers for Europe are about 55, 45. I am stupified by how passive African electorates are. How long would Robert Mugabe have lasted in Serbia?
Bono has the wrong answer for the poor of the world (Part 3)
Bono praises the election of President Obama!!!
I love Milton Friedman’s film series “Free to Choose.” In that film series over and over it is shown that the ability to move from poor to rich is more abundant here than any other country in the world. This article below reminded me of that that.
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This is a series of posts that show that Bono (who I have been listening to since 1983) has the wrong solution to the problem of worldwide hunger.
Politico reports here that a group of celebrities, including former Baptist pastor Mike Huckabee, shouted a four-letter obscenity for cameras in a promotion to speak up against famine. Bleeps and labels to cover mouths obscure the actual word.
In the PSA, our celebrity supporters shout out one four letter word that the majority of viewers will find offensive, in order to shine a light on something only a minority seems to be offended by. I know the tone is a bit rough for ONE — that’s no accident. If it feels like a punch in the face, then good — mission accomplished. It’s time for a wakeup call and here’s the alarm. Love it? Great. Hate it? OK. Just don’t ignore it.
I’m not sure I believe Huck did precisely as described.
_____________
One of the key parts of the solution is economic freedom, economic growth and free trade. It is not the bailout, welfare approach of President Obama who Bono supported in 2008.
Daniel Griswold is director of the Center for Trade Policy Studies at the Cato Institute.
Added to cato.org on October 30, 2004
This article appeared on cato.org on October 30, 2004.
I’m happy to talk about how to explain the benefits of free trade to the public. It took me until I was about 35 years old to figure out that that is my calling in life, explaining free trade, and doing it not just to the high and mighty in Washington, but to people around the country and hopefully around the world. I’ve spent two thirds of my adult life outside of Washington, D.C. Twelve of those years were in Colorado Springs, Colorado, as an editorial page editor, writing daily editorials for 100,000 different households in a community that’s very much a slice of Middle America.
How we explain the benefits of free trade is hugely important today. Trade and globalization are being debated on cable TV every night. The expansion of trade and foreign investment is determining the shape of our world. And it is controversial among the public if not in the economics profession. Surveys of economist show that a large majority free trade is the right policy. Study after study confirms what theory has long taught, that countries open to trade grow faster and achieve higher incomes than those that are closed.
The public does not share the view of the economics profession on trade. People have a general notion that trade is good for the country, but then they have all sorts of qualifications. Most people will accept trade as a general principle as long as we require minimum labor and environmental standards in poor countries and protect U.S. workers. So you see this gap between the economics profession and the public.
Daniel Griswold is director of the Center for Trade Policy Studies at the Cato Institute.
This gap persists despite 200 plus years of having “The Wealth of Nations” by Adam Smith. If you haven’t read “The Wealth of Nations,” I would highly recommend it, especially Book IV. Adam Smith’s writing is so lively and applicable to today. Then we have the French economist Frederic Bastiat. I’m not sure how anybody could explain free trade better than Bastiat. And yet, here we are, 150 years later, still debating and trying to explain free trade.
Trade Benefits for Producers
Another point is that companies and businesses are huge importers. Half of what we import to the United States each year is imported for businesses. They import raw materials, energy and lumber and cement and that sort of thing. They import intermediate components, parts, auto parts, computer parts, that go in for final assembly. And then of course they import re is capital machinery, machines that come in that make U.S. companies more competitive.
Here are some examples: A typical American computer has “Dell” or “Hewlett Packard” stamped on it, but most of it is made overseas. Maybe some of the most important parts are made in the United States, the brains of it, but the components, the hard drives, the flat panel display screens are made abroad. In fact, 60 percent of a typical American computer is made in the Far East. We are much better off because of that. We can afford computers in our homes, in our businesses. Our whole economy is more productive.
Consider steel. It was not one of President Bush’s finest moments when he imposed tariffs on steel in March of 2002. Yes, it probably kept one or two aging steel mills in business, but it raised the price of steel for a broad swath of U.S. industry–the automobile industry, the tool and die industry and other metal fabrication businesses, the construction industry. Those sectors use a lot of steel, and they paid a price for those tariffs.
One of the arguments the Cato Institute made that was quite effective in Congress in stopping steel protection was we pointed out that for every job in the steel industry, there are 40 jobs in the United States in industries that use steel as a component in its production. This was a perfectly legitimate free trade argument that also playing on this public desire to defend jobs. You want to protect jobs? There are more jobs in jeopardy from higher steel prices than are protected by higher steel prices.
Sugar is yet another example. Yes, sugar quotas cost costs U.S. consumers almost $2 billion a year, or $20 a year to a typical American household. But the quotas also cost jobs. Chicago used to be ringed by confectionery companies that would take sugar in as an important input and crank out Lifesavers and candy bars. In 2002 a Lifesaver factory in Holland, Michigan, announced it was moving to Canada because Canada allows sugar to be bought at the global price. We’re losing jobs because of sugar protection.
So again, you’re emphasizing the producer. You’re putting protectionists on the defensive. The sugar program is costing manufacturing jobs. The steel tariffs are costing manufacturing jobs.
When foreigners sell us something, they earn dollars, but then they have to do something with those dollars. They can’t pay their workers and suppliers back in Japan or China with dollars. They exchange the dollars they earn for their local currency, and then those dollars come back to the United States to buy our goods and services. They also come back to buy investment assets.
So what happens when we raise trade barriers? It’s harder for foreigners to earn those dollars to spend in our markets. So when you suppress imports into the United States through trade protection, you’re also going to see exports fall. You’re going to see foreign investment fall. And of course you invite retaliation, too. If we raise our trade barriers, other countries raise theirs. So import barriers put exports at risk. It’s a very important point to make.
Let me add a concluding word about production. We hear the charge that America is “de industrializing.” Here is where some simple facts can work so well. I just love to point out that, in the United States, we are manufacturing 50 percent more stuff than we were a decade ago. According to the Federal Reserve, manufacturing output in the United States is up 50 percent in the past ten year, double what it was in 1980, and triple what it was in the good old 1960s. We’re producing more stuff with fewer workers because they are so much more productive. Is that bad that our workers are more productive?
Trade and Jobs–The Real Story
This leads us to a third major battle ground–jobs. All right, you want to talk about jobs? Let’s talk about trade and jobs. Again, acknowledge the pain of workers laid off because of import competition, but we need to put those layoffs in the context of the tremendous job churn in a dynamic market economy. Our eye is always on the net jobs gained and jobs lost, but underneath that number are millions of jobs that are created and destroyed every year. This is the “creative destruction” Joseph Schumpeter talked about.
The U.S. Labor Department has actually tried to calculate total jobs lost and total jobs created, and what they found is that in a typical year, there are something like 30 million jobs in the U.S. economy that are eliminated, half of them permanently. Fifteen million jobs every year just disappear, never to come back again. The other 15 million are seasonal type jobs that disappear and then pop up again.
How many jobs do you think are lost from trade every year? It’s about 400,000. Those are jobs lost because of imports from China and other places that displacing U.S. production, from outsourcing, that sort of thing. To put that number in context, the U.S. economy employs 140 million workers. Of those, about 325,000 people every week are lining up for unemployment insurance. There is a story behind every one of them. So of the 15 million jobs that disappear permanently each year, trade and outsourcing accounts for 2 percent–2 percent–of the total jobs displaced in the U.S. economy.
What eliminates the other 98 percent? Changing consumer tastes, new technology, domestic competition. Let’s put some flesh and blood on that fact. Kodak, the good old camera company, has laid off 25, 000 workers in the past two years. Because of outsourcing? Because of trade? No. Because of those nifty digital cameras that I bet just about everybody in this room owns. You contributed to putting a Kodak worker out of work with that digital camera. Would we seriously think of banning digital cameras to save those jobs? It would be ludicrous. And yet, that’s what we’re talking about when we consider restricting outsourcing or raising tariffs. When we talk about people who have lost their jobs from trade, we should talk about everybody who has lost their jobs for whatever reason. There is nothing unique about trade when it comes to jobs.
Free Trade and the World’s Poor
Another area of positive terrain for us that we shouldn’t give up is the poor and the world’s children. The highest trade barriers remaining in the United States are aimed at products that are disproportionately consumed by poor people at home and produced by poor people abroad. Our highest trade barriers are on farm products, on textiles and apparel and shoes. And not just all shoes. We have our highest trade barriers on low end shoes, the kind you would buy in a Pay Less Shoe Store. But not on the kind you would buy in a Gucci store.
A moderate Democratic think tank in Washington called the Progressive Policy Institute issued a study in 2004 that documented that U.S. tariffs are much higher on low-end goods than high-end goods. For example, the tariff on imported silk underwear into the United States is virtually zero, but the tariff on imported synthetic or low grade cotton is higher. So if you wear silk underwear, you get a low tariff. If you wear the regular kind of underwear like the rest of us, you pay a high tariff. This study calculated that a single mother with two children earning $20,000 a year pays an effective tariff on the goods she consumes that’s three times higher than what a single executive earning $100,000 a year would pay.
Our existing trade barriers are biased against the poor at home. A trade representative in Washington likes to say that our goal should “to make sure that every discount store in America is a duty free shop for working families.”
How about the world’s poor? Here’s a headline you probably didn’t see in your local newspaper:” Global Poverty Down by Half Since 1981.” The Share of the world’s population living on dollar a day or less has dropped from 40 percent then to 20 percent today, and that share is expected to continue to fall. And by the way, virtually all that progress has happened in poor countries that have progressively globalized. Places like Sub Saharan Africa, there is very little progress. In fact, the number of poor is rising in those places.
The World Bank could not find a single example of a poor country that had kept its markets closed and chased away foreign investment, and at the same time made progress against poverty. In other words, all the poor countries that followed our example, most of them have made progress against poverty. Those that follow the teachings of the anti globalization people have made no progress.
The evidence on trade and poverty became so overwhelming that Oxfam International issue a study in 2002 that, while critical of a lot of things in the global economy, came down firmly on the side of trade being a friend of the poor. And they pointed out that by getting rid of these rich-country trade barriers, we could deliver twice as much income to poor countries as all the aid we give them.
More trade, more democracy
Let me end up with a few thoughts about war and peace and democracy, another area where we’re on solid terrain and where this does resonate with people more than the consumer issues. And this is especially effective in the post 9/11 world. September 11th made my job of promoting immigration more difficult. It made the job of promoting trade liberalization a little bit easier.
Bob Zoellick, the former U.S. Trade Representative, was fast out of the block. He had an op-ed in the Post about a month after September 11th, saying this is one more reason to progressively pursue global trade, because trade promotes higher living standards, human rights, democracy, and more cooperation among nations. And he was on solid ground. That was not an opportunistic argument; it was a factual argument.
I think this especially works with older audiences, people who can remember, or at least their parents can remember, the Great Depression. We had the Smoot Hawley Tariff Act in 1930. It was a disaster by all measures. Let’s remind people of that. It’s a good history lesson. Granted, Smoot Hawley did not cause the Great Depression, but it certainly didn’t end it. It didn’t create jobs. It deepened and prolonged the Great Depression. It launched a downward global spiral in trade, by encouraging trade barriers abroad that exacerbated international tensions and helped lay the groundwork for World War II.
One of the many good decisions made during and after World War II was, in the United States, to turn away from protectionism towards freer trade. We launched the General Agreement on Tariffs and Trade. We encouraged the Europeans to trade more with each other through the common market. And you have to say, that’s been a spectacular success in terms of promoting the peace in Western Europe. And this was a bipartisan policy supported by JFK, Eisenhower, and Truman.
The world today is more democratic and politically free because of trade and globalization. A 2004 Cato study documented that countries that are open to trade are more likely to be democracies and respect human rights. We can point to examples of South Korea, Taiwan, Chile, Mexico, Ghana–all are countries that embarked on economic liberalization, which laid the groundwork for political liberalization.
Free trade begets a growing middle class, which often forms the backbone of political pluralism. Freedom House, a New York-based think tank, has documented that a higher share of the world’s people are living under democracies today, where they enjoy political and civil liberties, than at any time in human history. That’s another headline you probably didn’t see in the New York Times recently, but it’s true.
More peace on Earth
Finally, free trade has spread peace around the world. By encouraging democracy, democracies are less likely to fight wars with each other. In fact, they virtually never do. But also globalization has given governments one more reason not to go to war because, among its evils, it disrupts trade, which raises the cost of war. Trade doesn’t prevent war, but it gives leaders one more reason to stop and think before they go to war.
Here’s another headline I bet you didn’t see in one of the major papers. This was actually an Associated Press headline from April 2004: “War declining worldwide, studies say.” And sure enough, according to a Swedish think tank, the number of people who die in international wars annually is down to about 20,000, the lowest figure in the postwar era. That compares to the 700,000 people who died in 1951. According to the World Bank, civil wars are declining in those less developed regions that are globalizing. All this dies into the war on terrorism, of course. The Middle East is one of the least globalized regions in the world. Their share of global trade and investment has been declining significantly. Outside of oil, they offer virtually nothing to the rest of the world.
Mohammed Atta, the ringleader of the September 11 attacks, was not poor. He had a master’s degree can came from a well-to-do Egyptian family. He just didn’t have a future. He came from a stagnant country, socially, politically, and economically. We need to encourage, among other things, for countries in the Middle East to trade more with each other.
We do not help the situation with cotton subsidies in the United States. They deliver subsidies to 25,000 U.S. cotton farmers, with an average per capita wealth of $800,000. That drives down the global price of cotton. Where are the cotton producers in poor countries? Well, among them are Sub Saharan African countries like Mali. Mali is one of the few Muslim majority countries in the world that is free, that has a democracy, where people enjoy full civil and political liberties. How do we encourage that sort of political and economic reform in the Muslim world? We drive down the global price of their chief commodity export through our cotton program, extracting $250 million a year from that part of the world, where that is no small change.
Free trade makes us freer as individuals. It makes us better off as consumers. It makes us more productive as workers and producers, lifting hundreds of millions of people out of poverty around the world and spreading democracy, human rights and peace around the world. That is the story we must tell.
U2 performs Pride: In the name of Love, a song about Martin Luther King, at President-elect Barack Obama’s Inaugural concert on the Lincoln Memorial in Washington D.C. Bono told the estimated 600,000 there that on Tuesday “that dream comes to pass.” Jan. 18, 2009
Politico reports here that a group of celebrities, including former Baptist pastor Mike Huckabee, shouted a four-letter obscenity for cameras in a promotion to speak up against famine. Bleeps and labels to cover mouths obscure the actual word.
In the PSA, our celebrity supporters shout out one four letter word that the majority of viewers will find offensive, in order to shine a light on something only a minority seems to be offended by. I know the tone is a bit rough for ONE — that’s no accident. If it feels like a punch in the face, then good — mission accomplished. It’s time for a wakeup call and here’s the alarm. Love it? Great. Hate it? OK. Just don’t ignore it.
I’m not sure I believe Huck did precisely as described.
_____________
One of the key parts of the solution is economic freedom. It is not the bailout, welfare approach of President Obama who Bono supported in 2008. Here is the second part of an excellent article from the Cato Institute:
Ending Mass Poverty
by Ian Vásquez
September 2001
Ian Vásquez is director of the Cato Institute’s Project on Global Economic Liberty. This essay originally appeared on the U.S. Department of State’s electronic journal, Economic Perspectives (September 2001).
Economic growth is the “only path to end mass poverty,” says economist Ian Vásquez, who argues that redistribution or traditional poverty reduction programs have done little to relieve poverty. Vásquez writes that the higher the degree of economic freedom — which consists of personal choice, protection of private property, and freedom of exchange — the greater the reduction in poverty. Extending the system of property rights protection to include the property of poor people would be one of the most important poverty reduction strategies a nation could take, he says.
The historical record is clear: the single, most effective way to reduce world poverty is economic growth. Western countries began discovering this around 1820 when they broke with the historical norm of low growth and initiated an era of dramatic advances in material well-being. Living standards tripled in Europe and quadrupled in the United States in that century, improving at an even faster pace in the next 100 years. Economic growth thus eliminated mass poverty in what is today considered the developed world. Taking the long view, growth has also reduced poverty in other parts of the world: in 1820, about 75 percent of humanity lived on less than a dollar per day; today about 20 percent live under that amount.
Even a short-term view confirms that the recent acceleration of growth in many developing countries has reduced poverty, measured the same way. In the past 10 years, the percentage of poor people in the developing world fell from 29 to 24 percent. Despite that progress, however, the number of poor people has remained stubbornly high at around 1,200 million. And geographically, reductions in poverty have been uneven.
This mixed performance has prompted many observers to ask what factors other than growth reduce poverty and if growth is enough to accomplish that goal. Market reforms themselves have been questioned as a way of helping the poor. After all, many developing countries have liberalized their economies to varying degrees in the past decade.
But it would be a colossal mistake to lose focus on market-based growth and concentrate instead on redistribution or traditional poverty reduction programs that have done little by comparison to relieve poverty. Keeping the right focus is important for three reasons — there is, in fact, a strong relationship between growth and poverty reduction, economic freedom causes growth, and most developing countries can still do much more in the way of policies and institutional reforms to help the poor…
The Importance of Economic Freedom
The West’s escape from poverty did not occur by chance. Sustained growth over long periods of time took place in an environment that generally encouraged free enterprise and the protection of private property. Today, developing countries have an advantage. By adopting liberal economic policies, poor countries can achieve within one generation the kind of economic progress that it took rich countries 100 years to achieve. High growth is possible because poor countries will be catching up to rich countries, rather than forging a new path. Studies by both the World Bank and the International Monetary Fund confirm that countries such as China and others that have chosen to open their economies are indeed converging with the industrialized world.
The most comprehensive empirical study on the relationship between economic policies and prosperity is the Fraser Institute’s “Economic Freedom of the World” annual report. It looks at more than 20 components of economic freedom, ranging from size of government to monetary and trade policy, in 123 countries over a 25-year period. The study finds a strong relationship between economic freedom and prosperity. Divided by quintiles, the freest economies have an average per capita income of $19,800 compared with $2,210 in the least free quintile. Freer economies also grow faster than less free economies. Per capita growth in the 1990s was 2.27 percent in the most free quintile, while it was -1.45 percent in the least free countries.
The Fraser study also found that economic freedom is strongly related to poverty reduction and other indicators of progress. The United Nations’ Human Poverty Index is negatively correlated with the Fraser index of economic freedom. People living in the top 20 percent of countries in terms of economic freedom, moreover, tend to live about two decades longer than people in the bottom 20 percent. Lower infant mortality, higher literacy rates, lower corruption, and greater access to safe drinking water are also associated with increases in economic liberty. Indeed, the United Nations’ Human Development Index, which measures various aspects of standards of living, correlates positively with greater economic freedom.
The implications for the poor are impressive. Economists Steve Hanke and Stephen Walters examined the leading empirical studies on the relationship between economic freedom and prosperity and concluded that a 10 percent increase in economic freedom tends to increase per capita gross national product by 7.4 to 13.6 percent. Since developing countries can still increase their levels of economic freedom substantially, and some have by 100 percent or more in the past two decades, the payoff of enhanced liberty can be seen not only in terms of growth but also in terms of a range of human development indicators. Hanke and Walters found, for example, that an increase in per capita income from $500 to $1,000 produces a rise in life expectancy of about 6 percent. Indeed, high growth creates the wealth that makes it possible for countries to invest in health, education, and other human needs that are an essential part of continued growth. Nor are those benefits shared unequally. The Fraser study found that there is no correlation between economic freedom and inequality, while a World Bank study has found that the incomes of the poorest 20 percent of the population rise proportionately with the average rise in income.
Toward More Effective Poverty Reduction
Although the collapse of central planning forced many countries to abandon inward-looking economic policies in the 1990s, most of the developing world is still far from adopting a coherent set of policies consistent with economic freedom. Russia may have dumped communism, but in terms of economic freedom the Fraser Institute ranks the country 117 out of 123 nations. Even countries such as Argentina and Mexico that have done much to liberalize their economies have clung to policy remnants of the past, with devastating consequences for the poor. Mexico’s peso crisis of 1994-95, for example, resulted from monetary and fiscal policies during an election year that were thoroughly inconsistent with market economics.
Attention to market-oriented macroeconomic policies is well founded, particularly since they benefit the poor. That is especially so of two such policies — reducing inflation and the level of spending — which disproportionately favor the poor. Much less attention, however, has been paid to institutional reforms and the microeconomic environment. Three areas stand out: the rule of law, the level of bureaucratic regulation, and the private property rights of the poor.
A legal system capable of enforcing contracts and protecting persons and their property rights in an evenhanded manner is central to both economic freedom and progress. Indeed, the sustainability of a market economy — and of market reforms themselves — rests largely on the application of the rule of law. Yet the rule of law is conspicuously missing in much of the developing world. The 2001 “Economic Freedom of the World” report, which includes a more comprehensive index of economic freedom for 58 countries, takes this measure into account. It finds that Latin American countries rank especially low in this area. Also at the bottom of the list are transition countries such as Russia and Ukraine. Were reliable data available for African countries, they would no doubt receive low ratings as well.
The absence of the rule of law is especially unfortunate for the poor, not only because they have fewer private resources to protect their rights, but also because the rule of law in itself is related to economic growth. Robert Barro created an index that measured the rule of law on a scale of 0 to 6 and found that a country’s growth rate increases by half a percentage point with each increment in his index. Because the rule of law provides essential protections for the poor, sustains a market exchange system, and promotes growth, it may well be the most important ingredient of economic prosperity.
Another much neglected area in need of reform is regulation. Here again the Fraser Institute’s comprehensive index found that the freedom to operate a business and compete in the market is circumscribed in much of the developing world. The same countries that ranked low in the rule of law area ranked low in this area. To have an idea of the bureaucratic burden with which people in the developing world must contend, consider the cases of Canada, Bolivia, and Hungary. According to a study by the National Bureau of Economic Research, it takes two days, two bureaucratic procedures, and $280 to open a business in Canada. By contrast, an entrepreneur in Bolivia must pay $2,696 in fees, wait 82 business days, and go through 20 procedures to do the same. In Hungary the same operation takes 53 business days, 10 procedures, and $3,647. Such costly barriers favor big firms at the expense of small enterprises, where most jobs are created, and push a large proportion of the developing world’s population into the informal economy.
The informal economy in the developing world is large due to another major factor. The private property rights of the poor are not legally recognized. Peruvian economist Hernando de Soto has documented how poor people around the world have no security in their assets because they lack legal title to their property. In rural Peru, for example, 70 percent of poor people’s property is not recognized by the state. The lack of such legal protection severely limits the wealth-creating potential that the poor would otherwise have were they allowed to participate within the legal framework of the market. Without secure private property rights, the poor cannot use collateral to get a loan, cannot take out insurance, and find it difficult to plan in the long term.
Ending what amounts to legal discrimination would permit poor people to benefit fully from the market system and allow the poor to use their considerable assets to create wealth. Indeed, as de Soto has shown, the poor are already asset rich. According to him, the assets of the poor are worth 40 times the value of all foreign aid since 1945. The wealth of Haiti’s poor, for example, is more than 150 times greater than all foreign investment in that country since its independence in 1804. In the limited places that poor people’s property has been registered, the results have been impressive. Where registration was done in Peru, new businesses were created, production increased, asset values rose 200 percent, and credit became available.
Extending the system of property rights protection to include the property of poor people is the most important social reform that developing countries can undertake. It is a reform that has been almost completely ignored around the world, yet it would directly affect the poor and produce dramatic results for literally thousands of millions of people.
Keeping the Right Focus
Countries have ended mass poverty only by following policies that encourage economic growth. But that growth must be self-sustaining to translate into enduring increases in wealth. Policies of forced industrialization or state-led development may produce high growth for a time, but history has shown that such episodes are followed by economic contraction. Economic freedom, by contrast, shows a strong relationship with prosperity and growth over time. Fortunately, many developing countries are following that path, producing high and rapid growth and showing that it is good for the poor. Their experience may create a demonstration effect for the majority of nations that are in many ways still economically unfree.
All developing nations can do more to increase growth. Establishing the rule of law, reducing barriers that hamper entrepreneurship and competition, and recognizing the property rights of the poor are three reforms that go beyond the liberalization measures that many countries have already introduced. Those reforms not only contribute to economic growth; they increase the effectiveness of growth in reducing poverty. Policy-makers in rich and poor countries alike should not lose focus on the promise of growth. It remains the only path to end mass poverty.
U2 performs Pride: In the name of Love, a song about Martin Luther King, at President-elect Barack Obama’s Inaugural concert on the Lincoln Memorial in Washington D.C. Bono told the estimated 600,000 there that on Tuesday “that dream comes to pass.” Jan. 18, 2009
The Daily Hatch 