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Solidarity and Subsidiarity: The Economics of National and Global Poverty

Professor Jeffrey D. Sachs
Columbia University

I am going to start out with something rather conventional for me, and to show us some numbers and talk about the concepts of social inclusion from an economic point of view, because I think having a common statistical, empirical base is also important for our discussion. So, I want to talk about poverty as economists view poverty and to show some of the trends and some of the issues that are raised by the concept. Poverty has two meanings, and social inclusion invokes both of them. One is the poverty that means that the material conditions of life are so extreme that basic needs cannot be met, and this is typically called absolute poverty or extreme poverty. And, in the official system, it is measured by the global scorekeeper, which is the World Bank. The World Bank, every few years, puts out estimates of the number of people living in absolute poverty. The current definition is to live at less than $1.90 of consumption, per person, per day. Even that definition has lots of statistical difficulties and assumptions built into it, because it is $1.90 measured at international prices, so it is a statistical creation. The world is then surveyed using various kinds of household survey data and estimates of the number of people living below $1.90 per person, per day – consumption is then estimated. The second major definition is more what we would think of as a kind of social exclusion, and that is the idea that if, again, economic income is below a certain threshold relative to the norm of the community, this makes impossible a dignified life in the mainstream of the community. And here the OECD keeps a score card for the high-income countries of households that are below half of the median income, and that share of households below half of the median income is called the relative poor, and the OECD puts out a poverty measure for those.

So, I wanted to go through the data to see where we stand, and then make some observations about where these trends come from, what they mean for our practical thinking, both in the normative sense and also in the policy dimension. Let me emphasize, as Stefano Zamagni did in his opening remarks, that the Sustainable Development Goals (SDGs) explicitly address both dimensions of poverty, both the absolute dimension and the relative dimension. In absolute terms, SDG number 1 says that extreme poverty should be ended – that is the leading SDG, and the main metric for that is that World Bank measurement of persons living below the absolute poverty line. Many of the other early SDGs – number 2 to end hunger, number 3 to ensure universal health coverage, number 4 to ensure universal education, number 6 to ensure universal access to water and sanitation, number 7 to ensure universal access to modern energy services, number 8 to end all forms of modern slavery and bonded and child labour – are also part of that end of absolute poverty. Goals number 5, 10 and 16 are really mostly about relative poverty; Goal number 5 is about gender equality; Goal number 10 calls for reducing inequalities within countries, as well as across countries; and Goal number 16 calls for inclusive societies with attention to reducing levels of violence and also exclusion of minority groups. In terms of absolute poverty, the World Bank estimates the proportion of the world living in absolute poverty. And the red dot shows the estimated proportions since 1990. And what you see is a very, very significant decline, according to the World Bank estimates, of the proportion of the world population living in absolute poverty, from 37.1% in 1990 to 9.6% in 2015.

Most of that decline, by the way, shows up in people living at $3 or $4 per person, per year. So, you would not regarded as affluence by any standard, it would still be conceived quite poor by the standards of where we sit today in high-income countries, but it is out of the bound of extreme or absolute poverty. This gain, in my view, is real; it is not a statistical illusion. It is, mainly, the gain in China by the way, but not only. China transformed over the last 40 years from a rural and very poor society to a middle-income, mainly urban society, where earlier fears of famine and hunger, which were quite real even 40 years ago, have been overcome – remember how many people died at Mao’s hands in the Great Leap Forward with the starvation – and people now live a full middle-income life. So, this is a remarkable gain in material conditions and I think it should be taken very, very seriously as a very substantial gain and success of the world economy.

The absolute numbers of people living in extreme poverty are shown by the columns. So, it was about 1.958 billion as of 1990, it is now estimated to be about 700 million. I think that number is a little bit low, probably I would put it close to a billion people, but you have in absolute numbers also a significant decline.

This shows up, incidentally, in many other ways, to emphasize that we are observing a real phenomenon, not simply a statistical phenomenon. The under-five mortality rate, which measures the number of children under the age of five dying each year, per 1000 of that age group, has declined from 182 per thousand deaths of children under 5, meaning for every thousand born 182 would die before their fifth birthday, statistically, in 1960, to 90 per thousand in 1990, 75 per thousand in 2000 and now 42 per thousand in 2015. That is a remarkable gain. Sadly, it still means nearly six million children under the age of five dying each year and almost every one of those deaths is preventable, because the causes of deaths of children under 5, overwhelmingly, are caused by poverty. They are not caused by the lack of technological means to prevent or treat their diseases, but rather their exclusion from normal diets and normal health care. But the numbers have come down very, very significantly, so there is real progress that we need to recognize and build upon and it is this graph which led the world to say, “It is possible to reach zero in 2030”. In other words, the goal SDG 1 was not taken lightly, it was taken by putting a dotted line through those red dots and carrying the trend down to the year 2030. There is nothing automatic about such gains to be sure, but reaching near zero poverty is feasible, though unlikely I would say – unless there is a significant mobilization of international effort.

If you look at the regions of the world, the red line is the same data for the whole world; the blue line is for Sub-Saharan Africa, the locus of highest poverty remaining in the world; but you see, even in Sub-Saharan Africa the poverty rate went from 57%, estimated by the World Bank in the year 2000, to 37%, in the year 2015. And it is in East Asia and, overwhelmingly, China where the poverty rate went from above 60% to below 10%, during this 25-year period. So, this is a measure of how much progress can be made.

If one looks at where poverty remains, I think it is important for us to note that Sub-Saharan Africa, South Asia and pockets of poverty in Central America and in Southeast Asia, are the places where the poverty remains; those are the light shaded parts of the world map here. You cannot really tell very well from this, but generally landlocked countries, you can see Bolivia in South America, for example, or Afghanistan or Mongolia or other interior countries all through Sub-Saharan Africa, are disadvantaged in economic development and many geographical factors are partly at play in the places that remain with a high degree of extreme poverty. This is the same picture for the under-five mortality, and you can see that it is very, very similar to the previous map. These are the under-five mortality rates and you see that the epicentre of the absolute poverty challenges is Sub-Saharan Africa, followed by South Asia, followed by various pockets of poverty – Haiti, Bolivia, parts of the highlands of central America, parts of Southeast Asia.

One fact that has been strongly noted and, of course, we have discussed it many times here, is that the escape from extreme poverty in the past generation has been strongly related to the quality of education for children. And I think it is right to say that the single most important investment, of many important investments to be made, to help bring the extreme poverty line down to zero is in education. The graph has on its horizontal axis the test scores of internationally comparable tests that are given around the world on science, reading and math. And on the vertical axis is the economic growth rate so that upward sloping line means that regions that are testing well in lower levels of education are also achieving rapid economic growth and in the top right-hand corner here, those are countries that are growing rapidly and achieving very high education standards. And, if you could see the fine print, it is China, Korea, Taiwan and Singapore, are those four points in the upper right-hand quadrant; they have educational excellence combined with the very rapid progress on the economy.

What are key dimensions for ending absolute poverty? I would emphasize the need for education and health for all – SDGs 3 and 4. Of course, peace is vital because it is impossible to have any kind of economic or social development in the context of war, unfortunately war destroys economies and makes those investments all the more difficult; poverty is conducive to violence, sad to say, because of desperation and abuse and exploitation of the poor, but peace is clearly a precondition for development, and development is a key path towards peace. In all of the regions that have high poverty remaining, there are invariably indigenous communities and minority communities that face special social exclusion. There are an estimated 400 million indigenous populations around the world – 400 million! So, about 7% of the world’s population, 6 to 7% perhaps, everywhere they are poor. And, of course, girls and women face special discrimination in many places in the world. Then finally, global solidarity to help finance, the education, health and infrastructure needed to accelerate the escape from poverty in the poorest countries, and I will come back to that in a moment.

Let me turn to relative poverty, to have a picture of relative poverty. Relative poverty, of course, can exist in rich countries and the United States is an example of a very rich country with a considerable amount of relative poverty. America’s poor do not live under a $1.90 a day, but they are absolutely excluded from the mainstream of society, they face far worse health conditions, far worse education conditions, are passing through the penal system with incredible high frequency and, in general, face multiple indignities of a very high order. So, relative poverty can afflict, of course, the richest countries in the world as well.

This is one kind of map of relative poverty. The standard economist’s measure of income inequality is the Gini coefficient, which is a variable between 0 and 1. Zero signifying equality of income; 1 signifying complete inequality of income where, in theory, one household or one person would have all the income and everybody else would live without any income. And actual inequality, of course, therefore is between 0 and 1.

The green shaded areas of the world are the places with the lowest levels of inequality and the world’s superstars of low inequality are the Scandinavian countries, that have a Gini coefficient of about 0.25. You notice that all of the Americas have a high Gini coefficient; this means a high degree of inequality across the Americas. My view of this is that, basically, post-1492 settlement of the Americas, these are conquest societies of extreme inequality by ethnicity of settled European populations, indigenous populations, impoverished slave populations that were brought by the European colonizers and the legacy, 500 years later, remains remarkable inequality. And that is true in the United States, for example, which is the most unequal of any high-income country in the world. And it is, of course, hugely unequal by ethnicity but it is also unequal within social and ethnic groups as well, because of the lack of social solidarity and public policies.

Africa is another place of very high inequality and there are several features of that. The multiple ethnicities, the ethnic politics, the legacy of colonialism and the high dependence on natural resources, which is almost a sure way towards inequality within society. This graph is very important and very interesting to understand. It shows, for every rich country, two measures of the Gini coefficient – and remember, the higher the more unequal. The light shaded column is what we call the market income, and the blue shaded column is what we call the disposable income. The disposable income is after taxes and inclusive of public transfers, so, the blue column is everywhere lower than the white column, meaning that after taxes and transfers there is less inequality than before taxes and transfers. This makes sense, but what is interesting for me is that if you look at the height of the white columns, and you see that the countries are aligned by inequality of their disposable income – the most equal all the way on the left-hand side, and the least equal all the way on the right-hand side – you see that the market income inequalities are relatively similar across countries; the big differences across countries are in the inequality of disposable income. There is a lesson from this. What is happening in this figure is that certain countries, those on the left-hand side of the graph, are redistributing income through solidaristic public policies. The ones on the right-hand side of the graph have, what we would say, very small safety nets and very little solidarity in fiscal policy.

So, take the countries on the left-hand side. It includes Slovenia, Denmark, Czech Republic, Slovak Republic, Norway, Belgium, Finland, Sweden: these are countries with large social welfare states. The countries on the right-hand side include the United States, Turkey, Chile: these are countries with very small social welfare states. The fact that in the United States the white column and the blue column are almost the same, means that the market inequality is not reduced through public policy. So, the US market inequality is not so much bigger than in Denmark or Sweden, it is very surprising. But the disposable income is vastly different, because in the United States there is very little effort to redistribute income, indeed the whole system is geared towards resisting that, in fact, whereas, in the social-democratic countries in Northern Europe, the political system is oriented towards the significant amount of income redistribution.

This graph may help a little bit to explain, it is not so easy to read, but the blue line is the Tax-GDP ratio and the countries are aligned in this graph, from the lowest tax countries on the left-hand side to the highest tax countries on the right-hand side. The United States, for example, has a tax rate shown here of about 25% of national income, that is total taxes divided by total national income. If you go all the way to the right-hand side, there is Denmark, which taxes 50% of national income. What is happening here is, of course, that in the Northern European countries, half of national income is taxed and it is redistributed; whereas in the United States or in Mexico or in Chile, very little is redistributed. If you look at the red line, that is the poverty rate, it is a little bit hard to see, but that is a downward sloping line, I should have put it on two different axes. And what this is showing is that countries that have high Tax to GDP ratios have low poverty rates, countries that have low Tax to GDP ratios have high relative poverty rates. This again is a function of the solidarity of the fiscal system. So, the bottom line is a market economy creates a lot of inequality, but how that shows up in the actual equality or inequality of households depends a tremendous amount on what the public policy is. And if public policy is high taxation, combined with a high provision of universal services, such as health, education and infrastructure, then you end up with relatively equal societies even if the market inequalities are relatively high.

In the United States the inequality has soared for the last 40 years, and this is also important for us to understand, this is not unlike many places in the world. Government in the United States stopped redistributing income, around 1981 at noon, January 20. That is when Ronald Reagan was inaugurated as President, because the whole philosophy of the Reagan Revolution was to stop the role of social policy as much as possible. And we have been living with that legacy now for thirty-six years, and it has gone through every administration; no government has been able to win office on a social-democratic platform. Bernie Sanders campaigned on such a platform, he came close to winning the nomination, he surely would have won the presidency, but he did not get the nomination. We live, therefore, with a phenomenon in which government is not solidaristic; it reflects many aspects of the underlying social realities, but partly it reflects politics and I will come back to that in in a moment.

What are, therefore, the key dimensions of addressing relative poverty? Once again, universal access to basic health services are vital, fiscal redistribution is vital, social solidarity to guide the fiscal redistribution and – I will come back to this in a moment – where has the political locus of Northern Europe relied? It has been on the workers, because remember that the social-democratic movements began first and foremost as labour union movements. These were political movements, they were not only moral calls to action, they were political movements, they were struggle for power. The social-democratic parties based on the trade union movements won power, held power for decades and created that more equal fiscal environment.

Now, let me say a word about global solidarity, because the poorest countries are unable to provide the means, the financial means, to get out of poverty on their own, so they absolutely depend on development aid as a major instrument for escaping from poverty. And, what I am showing you here is a graph of who gives development aid, which countries as a share of their national income. The country on the farthest left is Sweden, its development aid is 1.4% of national income, GNI means Gross National Income. The next country is Norway, then Luxembourg, then Denmark, Netherlands, UK, Finland, Switzerland, and Germany. If you go quite far to the right you see the United States. Look at the difference between Sweden, which gives 1.4% of national income in development aid, and the United States – even richer than Sweden – but it gives just 0.17% of development assistance; and the difference between those two, if the United States gave what Sweden gives, we would be giving another 200 billion dollars per year of development aid. It is almost unimaginable if we were matching Sweden’s performance and this is a deeply missing feature of global solidarity.

Well, I made this graph this morning to illustrate a point, which is that if you array these countries in this scatter diagram, on the horizontal axis I show the poverty rate and on the vertical axis I show the level of aid as a share of GDP. You see Sweden, way up in the upper left-hand corner, it has zero poverty and a great deal of aid; if you look at the lower right-hand corner, you see the United States: it has high poverty and very little development aid.

My conclusion is, if you are solidaristic at home, you are also solidaristic abroad. Americans cannot understand why they should help the world’s poor because they do not even help America’s poor, and so the there is a very strong downward-sloping relationship here, which is showing that solidarity at home goes with solidarity internationally.

I know we are going to spend two days talking about how to foster solidarity and what the roles are, but let me mention a few quick thoughts that I would just add on this final point. First, where does social inclusion come from? Partly it is history, geography, demography but, of course, it is also ideas, social spirit and communion, it is also power because social democracy and solidarity has never been won without a struggle as well. Even in Scandinavia, these countries were quite unequal until power was won by the trade unions, and then the trade unions were highly responsible, they were very wise, they were very agreeable, but they had to win power in order to achieve what they achieved. I would add two more factors: habit because once you get into the habit of solidarity, as Aristotle taught, you are much more likely to remain solidaristic, and education, both moral education and, of course, education of the poor to help defend their rights.

What undermines social solidarity and social inclusion? The flipside of all of that. I just want to emphasize that we are dealing in a world of rather brutal power, and the idea that ideas alone, without ideas leading to the victory, whether it is at the elections or in some other way, probably is not sufficient. There is a lot of what I would call moral arbitrage. Moral arbitrage meaning that if much of society behaves well, if one is not careful, the sociopaths are able to exploit that good behaviour to their own benefit, and Wall Street is an example of that. If a pharmaceutical company is behaving responsibly, all you need is a sociopath to make a raid on that company, buy it and then raise the price of the drugs a hundred times, which is what has happened repeatedly now in the past year, and you end up having those good intentions undermined by the market. So the market can be an instrument for moral arbitrage, and it is a dangerous instrument in that way, because we are in a world where there is a lot of sociopathy and many of them are leaders of this kind of financial arbitrage right now, and we have to be very much aware of that. And finally, I would say, and I mentioned it earlier, unless we are in the habit of calling out bad behaviour, unless we are in the habit of saying, “That was wrong, you cannot sit at this table anymore, even if you are not sitting in jail, you cannot achieve approbation in our society”, I think we are not going to be successful, because, if those moral arbitragers, who can be quite vicious, are praised for their actions, we have a very, very hard time overcoming their bad behaviour. So, I will stop there. Thank you.

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