Promoting Prosperity: Pushing Past Poverty · Three intellectually noxious but robust weeds that need to be dug up and carted away Intellectual Weeds • Low-bar, “dollar a day”-like

Promoting Prosperity:Pushing Past Poverty

Lant PritchettMay 29th 2019

5th Annual Oxford Poverty and Business Conference

Clear, Build, Hold

Today I want to both clear away some ideas that are weeds clogging up the potential garden (“clear”) and then plant some seeds into that space (“build”)

Three intellectually noxious but robust weeds that need to be dug up and carted away

Intellectual Weeds• Low-bar, “dollar a day”-like

measures of poverty are legitimate and important targets

• That the main cause of mass poverty is the characteristics or decisions of people rather than place

• Targeted programs—either of redistribution or augmenting specifically the productivity of “the poor”—are a key to poverty reduction

Fruitful plants

• Creating prosperity eradicates both “low bar” (“destitution”) and high bar” poverty

• Widespread poverty is not the “poor people” but the result of productive people trapped in poor places

• Prosperity is created by including people into productive economies and organizations (jobs)

UK Poverty line(60 percent of median): $8080, $22.1 dollars a day

High-bar Poverty line: $10/day

Destitution or extreme

poverty”

“Rich” (100 dollars a day)

Global poverty (<10 dollars a day)

Global middle class (10< c<100 dollars a day)

Pushing towards prosperity

17.12561

9.673328

India’s “rich” are globally poor: 2011/12 rural 90th-100th

percentile is P$9.7/day and urban is P$ 17.1/day

There is no line at a poverty line! (and definitely not at a low-bar line)

• The intellectually (and morally) pernicious implication of low-bar poverty lines is that gains to income for people above the poverty line count for exactly zero.

• That gains to well-being above an arbitrary threshold count for nothing makes no sense on any level: economically, politically, morally.

• (Nearly) All of us highly value gains to our income far above the low-bar poverty line (by revealed preference)

Source: Stevenson and Wolfers 2013

If there were a “dollar a day” poverty line all these life satisfaction and income curves should be zero above the poverty line: they are never zero (slope doesn’t even go down)

It’s not who you are, it is where you are…personal productivity is mostly

about place

$344

$13,119

$0

$2,000

$4,000

$6,000

$8,000

$10,000

$12,000

$14,000

Estimated gain in householdannual income from a "gold

standard" anti-poverty program(increasing productivity in place)across five countries (Banerjee et

al 2015)

Gain from one year of a lowskilled worker working in USAversus their home country for

those same five countries(Clemens et al 2019)

PP

P a

dju

sted

do

llars

Two ways of reducing poverty: shift the distribution versus redistribute

Median

Approach I: Redistribution or targeted programs raise the incomes of those below the poverty line (e.g. cash transfers, microfinance, training, “graduation” programs, behavioral nudges, etc.) and hence reduce poverty without changing the median

Consumption

f()

The data say: all of the differences across countries in poverty rates are due to differences in median income and hence (almost)

none is due to anything else (including anti-poverty programs)

The correlation between actual country/year “middle bar” (P$5.5) poverty rate (blue triangles) and the poverty predicted by median income (red line) is .994 (as the absolute theoretical maximum for any two variables is 1 this is as high as correlations can be).

Put another way, country median income is empirically necessary and sufficient for poverty reduction

Country median income/consumption is empirically sufficient to eliminate “extreme poverty” (no country with high median has high poverty)

Country median income/consumption is empirically necessary to eliminate poverty (shown here at P$5.5/day) (no country has low poverty with low median income—for very low median income, the poverty line is above median)

(Extreme) Poverty fell from 80 percent of the population to almost zero in Vietnam not because of nudges or anti-poverty

programs or (mainly) because the intrinsic productivity of individuals got higher—the place got more productive

How did people move out of poverty? (multiple site, multiple method study across 17 regions) the reasons given in

interviews by people who moved out of poverty….

Jobs

22.2%

Individual Initiative - Ag

17.9%

Other

5.6%

New /multiple sources of income

10.5%

New Business

9.7%Hard Work

5.6%

Migration/remittances

2.8%

Women stepped out to w ork

2.3%

Higher education

0.9%

Family Factors

8.1%

Functioning of govt

4.0%

Housing improvement

3.3%

Increased community prosperity

2.5%

Loan/credit

2.1%Community groups

1.0%Legal title

0.6%

Inheritance

0.5%

NGO Assistance

0.3%Lottery/Luck

0.1%Illegal activities

0.1%

All Other

28.1%

Individual Initiative factors All other factors

Source: Narayan, Kapur, and Pritchett (2009)

NGO activities (.3%), lottery/luck (.1%), and illegal activities (.1%) the three least likely paths out of poverty named

71 percent named economic transformation related causes (jobs (22.2%, initiative (17.9%), new income sources (10.5%), new business (9.7%), hard work (5.6%), migration/remittances (2.8%), women working (2.3%)

Prosperity based on increased place based productivity with inclusive gains is the only demonstrated solution to high rates of poverty (at any global

poverty line)—targeted programs at best mitigate the consequences of the

lack of inclusive productivity growth rather than actually reduce poverty

Three new(ish) ideas to plant

In with the new• The key to sustained productivity

growth is structural transformation that expands the complexity of the productive structure which happens by linking together more and more diverse private and public capabilities.

• In that context “inclusion” is linking factors (like labor with different skill sets) into more complex production processes through networks or organizations, that is, jobs.

Old

• Accumulation driven theories

• “Isolated accumulationism” (e.g. “small is beautiful”, rural bias, people targeted)

• The problems with poverty is the intrinsic productivity of the people

The

Ricardo Hausmann’s Theory

of Economic Development

(following slides are his)

If you have only one letter…

… there aren’t many words to write.

If you have three letters…

You can write 4 words:

Now you have four letters…

You can write 8 words:

Think about all the words you could write

with:

You could write 595 words such as:

Rich (high productivity) places (across or within countries)….

• Produce lots of different products….high diversity of production

• Produce products that few other places produce….produce products with low ubiquity

0 100 200 300 400 500 600100

150

200

250

300

ALGARROBO

ALHUE

ALTO BIO BIO

ALTO DEL CARMEN

ALTO HOSPICIO

ANCUD

ANDACOLLO

ANGOL

ANTARTIDA

ANTOFAGASTA

ANTUCO

ARAUCO

ARICA

AYSEN

BUIN

BULNESCABILDO

CABO DE HORNOS

CABRERO

CALAMA

CALBUCOCALDERA CALERA DE TANGO

CALLE LARGA

CAMARONESCAMINA

CANELA

CANETE

CARAHUE

CARTAGENA

CASABLANCA

CASTRO

CATEMU

CAUQUENES

CERRILLOS

CERRO NAVIA

CHAITEN

CHANARAL

CHANCO

CHEPICA

CHIGUAYANTE

CHILE CHICO

CHILLAN

CHILLAN VIEJO

CHIMBARONGO

CHOLCHOL

CHONCHI

CISNES

COBQUECURA

COCHAMO

COCHRANE

CODEGUA COELEMU

COIHUECO

COINCO

COLBUN

COLCHANE

COLINA

COLLIPULLICOLTAUCO

COMBARBALA

CON CON

CONCEPCION

CONCHALI

CONSTITUCION

CONTULMO

COPIAPO

COQUIMBO

CORONEL

CORRAL

COYHAIQUE

CUNCO

CURACAUTIN

CURACAVI

CURACO DE VELEZ

CURANILAHUE

CURARREHUE

CUREPTO

CURICO

DALCAHUEDIEGO DE ALMAGRO

DONIHUE

EL BOSQUE

EL CARMEN

EL MONTE

EL QUISCO

EL TABO

EMPEDRADO

ERCILLA

EST CENTRAL

FLORIDA

FREIRE

FREIRINA FRESIA

FRUTILLAR

FUTALEUFU

FUTRONO

GALVARINO

GENERAL LAGOS

GORBEA

GRANEROS

GUAITECAS

HIJUELAS

HUALAIHUE

HUALANE

HUALPEN

HUALQUI

HUARA

HUASCO

HUECHURABA

ILLAPEL

INDEPENDENCIA

IQUIQUE

ISLA DE MAIPO

ISLA DE PASCUA

JUAN FERNANDEZ

LA CALERA

LA CISTERNA

LA CRUZ

LA ESTRELLA

LA FLORIDA

LA GRANJA

LA HIGUERA

LA LIGUA

LA PINTANA

LA REINA

LA SERENA

LA UNION

LAGO RANCO

LAGO VERDE

LAGUNA BLANCA

LAJA

LAMPA

LANCO

LAS CABRAS

LAS CONDES

LAUTARO

LEBU

LICANTEN

LIMACHE

LINARES

LITUECHE

LLANQUIHUE

LLAY-LLAY

LO BARNECHEA

LO ESPEJO

LO PRADO

LOLOL

LONCOCHE

LONGAVI

LONQUIMAY

LOS ALAMOS

LOS ANDES

LOS ANGELES

LOS LAGOS

LOS MUERMOS

LOS SAUCES

LOS VILOS

LOTA

LUMACO

MACHALI

MACUL

MAFIL

MAIPU

MALLOA

MARCHIGUEMARIA ELENA

MARIA PINTO

MARIQUINAMAULE

MAULLIN

MEJILLONES

MELIPEUCO

MELIPILLA

MOLINA

MONTE PATRIA

MULCHEN

NACIMIENTO

NANCAGUA

NAVIDAD

NEGRETE

NINHUE

NIQUEN

NOGALES

NUEVA IMPERIAL

NUNOA

O'HIGGINS

OLIVAR

OLLAGUE

OLMUE

OSORNO

OVALLEP AGUIRRE CERDA

PADRE HURTADOPADRE LAS CASAS

PAIHUANO

PAILLACO

PAINE

PALENA

PALMILLA

PANGUIPULLI

PANQUEHUE

PAPUDOPAREDONES

PARRAL

PELARCO

PELLUHUE

PEMUCO

PENAFLOR

PENALOLEN

PENCAHUE

PENCO

PERALILLO

PERQUENCO

PETORCA

PEUMO

PICA

PICHIDEGUA

PICHILEMU

PINTO

PIRQUE

PITRUFQUEN

PLACILLA

PORTEZUELO

PORVENIR

POZO ALMONTE

PRIMAVERA

PROVIDENCIA

PUCHUNCAVI

PUCON

PUDAHUEL

PUENTE ALTOPUERTO MONTT

PUERTO NATALES

PUERTO OCTAY

PUERTO VARAS

PUMANQUE

PUNITAQUI

PUNTA ARENAS

PUQUELDON

PUREN

PURRANQUEPUTAENDO

PUTRE

PUYEHUE

QUEILEN

QUELLON

QUEMCHI

QUILACO

QUILICURA

QUILLECO

QUILLON

QUILLOTA

QUILPUE

QUINCHAO

QUINTA NORMAL

QUINTA TILCOCO

QUINTERO

QUIRIHUE

RANCAGUA

RANQUIL

RAUCO

RECOLETA

RENAICO

RENCA

RENGO

REQUINOA

RETIRO

RINCONADA

RIO BUENO

RIO CLARO

RIO HURTADO

RIO IBANEZ

RIO NEGRO

RIO VERDE

ROMERAL

SAAVEDRA

SAGRADA FAMILIA

SALAMANCA

SAN ANTONIO

SAN BERNARDO

SAN CARLOS

SAN CLEMENTE

SAN ESTEBAN

SAN FABIAN

SAN FCO DE MOSTAZAL

SAN FELIPESAN FERNANDO

SAN GREGORIO

SAN IGNACIO

SAN JAVIER

SAN JOAQUIN

SAN JOSE MAIPO

SAN JUAN DE LA COSTA

SAN MIGUEL

SAN NICOLASSAN PABLO

SAN PEDRO DE ATACAMA

SAN PEDRO DE LA PAZ

SAN PEDRO DE MELIPILLASAN RAFAEL

SAN RAMON

SAN ROSENDO

SAN VICENTE T-T

SANTA BARBARA

SANTA CRUZ

SANTA JUANA

SANTA MARIA

SANTIAGO

SANTO DOMINGO

SIERRA GORDA

Sin Información

TALAGANTE

TALCA

TALCAHUANO

TALTAL

TEMUCO

TENO

TEODORO SCHMIDT

TIERRA AMARILLATIL-TIL

TIMAUKEL

TIRUA

TOCOPILLA

TOLTEN

TOME

TORRES DE PAINE

TORTEL

TRAIGUEN

TREHUACO

TUCAPEL

VALDIVIA

VALLENAR

VALPARAISO

VICHUQUEN

VICTORIA

VICUNA

VILCUN

VILLA ALEGRE

VILLA ALEMANA

VILLARRICA

VINA DEL MAR

VITACURA

YERBAS BUENAS

YUMBELYUNGAY

ZAPALLAR

k0 (Diversification)

k1 (

Avera

ge U

biq

uity)

Chile 2008 Diversity-Average Ubiquity Municipalities

In Chile there are cities with high diversity (lots of products) and low ubiquity (produce products few others do)—and cities that

produce few products and what they produce lots of other cities do too…

…and exactly the same in Turkey

ADANA

ADIYAMAN

AFYON

AĞRI

AMASYA

ANKARA

ANTALYA

ARTVİN

AYDIN

BALIKESİRBİLECİK

BİNGÖL

BİTLİS

BOLU

BURDUR

BURSA

ÇANAKKALEÇANKIRI

ÇORUMDENİZLİ

DİYARBAKIR

EDİRNE

ELAZIĞ

ERZİNCAN

ERZURUM

ESKİŞEHİRGAZİANTEP

GİRESUN

GÜMÜŞHANE

HAKKARİ

HATAY

ISPARTA

İÇEL

İSTANBUL

İZMİR

KARSKASTAMONU

KAYSERİ

KIRKLARELİ

KIRŞEHİR

KOCAELİKONYA

KÜTAHYA

MALATYA

MANİSA

KAHRAMANMARAŞ

MARDİN

MUĞLA

MUŞ

NEVŞEHİR

NİĞDE

ORDU

RİZE

SAKARYASAMSUN

SİİRT

SİNOP

SİVAS

TEKİRDAĞ

TOKAT

TRABZON

TUNCELİ

ŞANLIURFA

UŞAK

VAN

YOZGATZONGULDAK

AKSARAY

BAYBURT

KARAMAN

KIRIKKALE

BATMANŞIRNAKBARTIN

ARDAHAN

IĞDIR

YALOVA

KARABÜKKİLİS OSMANİYE

DÜZCE

10

20

30

40

50

60

k1

(A

ve

rag

e u

biq

uity)

0 500 1000 1500k0 (diversification)

Diversity and average ubiquity of Turkey's cities

Economic Complexity

Economic Complexity Index computed from export bundle (a country

that exports a diverse bundle with complex products) correlates with

GDP per capitaIn

com

e P

er

Cap

ita

Countries with Natural ResourceExports<10% of GDP

Countries with Natural ResourceExports>10% of GDP

A different (than Scrabble) metaphor for the “capabilities and complexity” model of prosperity

versus standard modelComplexity and capabilities: Grocery store• Lots of possible products: bread, milk,

tomato sauce, radishes, cranberry juice, pre-prepared Thai food, Hobnobs, Brie

• Each product has its own recipe.• Each recipe is a list of “capabilities”

required.• Some products have short, known

recipes with widely available capabilities (bread), others depend on rare capabilities (caviar), whereas others have long recipes with many capabilities, including rare ones

• Being rich is having the capabilities to produce everything in the grocery store—so (a) span a large set of capabilities and (b) collective know-how to implement recipes

Accumulation model of economic growth: More Bread

• One product: Bread.• Only one (basic) recipe and it

is known.• More bread requires more of a

few, known, inputs: flour, salt, leavening

• Having more inputs requires “saving” and accumulation

• Countries that are rich produce more bread than countries who are poor

The “Scrabble model”: Key to prosperity (high productivity) is structural transformation in the complexity of production

through the acquisition of capabilities

Implications for economic policy

• Economies need positive feedback loops to create the dynamics in which success creates pressures to expand private and public capabilities (versus, profits leading to choking off dynamism by protecting rents) (example from previous: how some economies (like South Korea) created and sustained the eco-system conditions for the “pull” of business to happen)

• A complex dynamic of economics, politics, and “deals” balanced between order (good) and openness to dynamism (good)—but “order” can easily choke off dynamism (this is more than “adopt good policies” which presumes rules based order)

Implications for poverty reduction: inclusion in a dynamic economy• Market Inclusion Infrastructure:

factors (including low skill labor) have to be able to get together easily and cheaply: power, transport, urban structures are key to move people to (or link them to) productive places (example earlier of Mangalore and the complexity of the value chain even of “simple” products and the importance of links of women producers to markets)

• Fair Playing Field: The “openness” and dynamism of business in a deals economy—the “informal sector” is often just a form of exclusion (who, and how, are actually able to innovate?)

The “Graduation” model is a multi-faceted (many components) program to transfer productive assets (livestock) to targeted poor households—paradigm of “isolated accumulationism”

(often the root of pushed “well-meaning solutions”)

Six countries (Banerjee et al 2015)• In one country the livestock

(chickens) had an infection and died, leaving HHs worse off.

• In five other countries this well-implemented and expensive ($4,500 in investment per HH) has modest gains in year 3, average of $344 implying a very modest ROI (7 percent at discount rate of 5 percent)

In South India (Bauchet, Morduch, Ravi 2015)

• No net impact of the program on incomes even though the program did not “fail” (was implemented)

• “Wages for unskilled labor rose sharply in the area while the study was implemented, blunting the net impact of the intervention and highlighting one way that treatment effects depend on factors external to the intervention itself, such as broader employment opportunities.”

“In poverty reduction, no success in the home can compensate for failure in the economy” (and vice versa)

Two examples of “linking to productivity” versus “isolated

accumulationism” programs for poverty

Get on the bus (Bryan, Chowdhury and Mobarak 2014)• North-west region of Bangladesh

has a low season with low productivity and hence incomes and hence often suffering.

• Instead of trying to address the problem in place, households were given a small ($8.50) incentive to migrate to a city (a higher productivity place) which led to gains in income and HH calorie intake—and the additional mobility of those who got the incentive was 10 percent higher even three years after.

Move money home on the phone (Lee et al 2017)

• The program just helped rural households sign up for mobile banking.

• This caused more remittances from movers to households—improving their lives in many ways—and workers were more likely to work in garment factors (jobs in high productivity sector), save more, and experienced less poverty.

Can ICT (information and communications technology) be a “market inclusive” infrastructure?

• In the “complexity and capabilities” approach the key to productivity has been linking your capabilities into long and complex value chains and this has usually required both co-location in place and large organizations.

• There is a potential for communications to create new opportunities for those in low productivity places:– Solving of information transmission problems that keep markets small

and segmented to that small producers can reach large markets via platforms.

– Allowing the production and value chain to reallocate spatially to (e.g. Baldwin’s “Great Convergence”)

• That said, ICT has counter-vailing forces that lead to concentration (larger “winner take all” markets) and have brought growth in developing countries in a very uneven way

Inclusion: City spatial evolution (where are the houses and where are the jobs) and transport (what does it

cost to get to a job) could be as important for women’s inclusion as targeted programs

Fair Playing Field

• A key feature that distinguishes developing countries is low state capability for policy implementation (Andrews, Pritchett Woolcock 2016).

• This low capability for implementation is often combined with legal and de jure regulations that are complex and highly restrictive (e.g. complex tax codes, detailed and strict regulation of land, labor, environment, etc.)

• The combination leads to a “deals” economy in which there is massively differential compliance with the law (Hallward-Driemeier and Pritchett 2015)

• This can easily created a politically favored “private” sector (which is really the public sector actors, disguised) which uses differential enforcement of regulation to create “good deals” for themselves and prevent the emergence of competitors and hence stymie innovation

• This creates a complex dynamic of start-stop growth as countries cycle through different stages of “deals” (Pritchett, Sen, and Werker 2018) as “closed ordered deals” can create/initiate growth episodes, but exclusion in “closed ordered deals” leads to sectoral stagnation (as innovation is stymied and “entrepreneurship” is pushed into the informal sector) and political resentment (as good opportunities are closed through manipulation) thus many of these episodes in stagnation or collapse.

• The hardest problem facing most developing countries is trying to work their way out of these “deals dynamics” into a more open and dynamic economy capable of working its way to prosperity.

• Mass poverty (particularly not middle or high bar poverty) will not be eliminated (or even affected much) by targeted programs, particularly not those modeled on “isolated accumulation” or re-distribution.

• Poverty is eliminated by increases in broad place-based productivity.

• Broad based productivity growth is created by eco-systems that:– promote the expansion of public and private capabilities which, in

turn, allow the production of more and more complex products (not “more of the same”) through the “pull” forces of innovation

– Link people to that productivity through infrastructure and fair playing fields.

• This, however, is a hard process to initiate and sustain politically as it is a complex interaction between the existing sources of economic and political powers which favor “stagnant exclusion” in which existing power is maintained rather than risk an economic dynamism that threatens their political settlement.

• This is why there are very few South Koreas (there are only a handful of “four-fold” development successes, many countries with mediocre growth (with episodic starts and stops), and tragically, many countries with less income today than in 1960

Thanks for support of research on inclusive growth (without implication

of agreement)

Promoting Prosperity: Pushing Past Poverty · Three intellectually noxious but robust weeds that need to be dug up and carted away Intellectual Weeds • Low-bar, “dollar a day”-like

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