For years we have been told that a billion or so people in the world have to live on “less than a dollar a day.” That originally meant that poverty was defined as a money income of $1.08 a day in terms of the US dollar at its 1993 level.
The value of the dollar was set at so-called purchasing-power parity, meaning what it would have cost an American to buy a defined selection of goods. (PPP, as it is known, is used in making international comparisons to avoid the distortions caused by fluctuations in exchange rates).
But the “dollar a day” standard has always seemed an unrealistic way of defining poverty, mainly because the poor countries of the world are not primarily money-based economies. Much of daily life, particularly in rural areas, is based on exchanges that do not involve money changing hands. Housing, food and sometimes clothing may be offered in return for labour, and food is also grown for direct consumption instead of having to be bought.
The World Bank has published two papers on which it is consulting with proposals to change the yardstick - partly to reflect some progress in reducing relative poverty levels since 1993, particularly in China.
But the prospective outcome is odd. $1.08 at 1993 prices would become $1.45 at 2005 PPP rates. But the new standard looks like being set at only $1.25 - a drop of 14 per cent in real terms. This, of course, has the effect of reducing the numbers of people below the threshold, and the World Bank has in fact decided to do just this. Having collected information from 75 of the poorer countries, it restricted its analysis to the 15 poorest among these – including 13 in sub-Saharan Africa.
So the new poverty standard is, in effect, $0.93 a day in the original 1993 dollars, and reflects almost entirely conditions in the worst-off parts of Africa.
While living conditions and levels of poverty remain appallingly low in much more of the world than covered by the new calculations, at the same time it would be quite wrong to assume that “living on a dollar a day,” or close to it, can be compared in any realistic way with the daily expenditure of advanced countries. Look at all the things the real poor do not need to bother with – not least all our “defensive” or negative expenditure: from insurance to gambling and from the disposal of refuse to countering pollution.
The Economist and Financial Times have been pondering the new poverty guideline. Two comments. First, what would a purchasing-power parity collection of goods worth $1.25 a day look like in London or New York? Secondly, the poverty line for a family of three could be just over $26 a week. Just enough to buy the Financial Times and the Economist for a week – and nothing else.
Archive for the 'Economics' Category
John Gieve’s participation in our financial roundtable turned out to be virtually his last hurrah as deputy governor of the Bank of England in charge of financial stability. A couple of days after Prospect was published, news leaked out that he would be stepping down from the post next spring, two years early. What’s more, the news emerged in the most humiliating way possible for Gieve—on the eve of the annual Mansion House speech, when the Bank governor and the chancellor of the exchequer address the bigwigs of the City. It looked as if Gieve had been made the fall guy for the financial crisis.
His departure may gratify those who argue—like Mark Hannam, another roundtable participant—that regulators as well as bankers should face the chop when things go awry in financial markets. But there is a school of thought that Gieve did a more than reasonable job. Philip Stephens took up the cudgels on Gieve’s behalf in the FT on 1st July, pointing out that Gieve’s performance was perhaps more sure-footed than that of Mervyn King (who has recently been reappointed to his post as Bank governor). Gieve spotted much earlier than his boss that the severity of the crisis necessitated a major injection of liquidity into financial markets. King, Stephens points out, was at the time still hung up on the idea of not rewarding bankers who had taken foolish risks—even as a financial Chernobyl was unfolding around him.
That said, these differences don’t seem to have had much impact on the outcome. King got it in the end. Would things have been different had he taken Gieve’s advice sooner? In the roundtable, Gieve himself pretty much pooh-poohed the idea.
But if Gieve did a pretty good job in what were very difficult circumstances, it is also right that he should go early. The biggest lack in the crisis—from the perspective of the authorities—was early intelligence about stresses in the markets. The Bank now intends to correct that lack. Its expanded financial stability role will involve monitoring what banks are doing to gauge emerging risks. That requires someone with a deep knowledge of the markets, something that Gieve—a former civil servant—lacks.
King should now replace Gieve with Paul Tucker, a Bank insider with the necessary independence of mind and market expertise. This is clearly what he wants to do. But worryingly, the treasury may try to frustrate King. It seems to favour the alternative of appointing an old City hand—even though this would run the risk of the Bank being captured by the very people it is supposed to be regulating. Stephens’s article—which implied King may have been complicit in Gieve’s departure—may have unwittingly handed the mandarins some ammo in this fight.
The one thing surrounding Gieve’s departure which does deserve criticism is the way it was handled. Gieve was an able and loyal servant of the Bank and was entitled to leave with his dignity intact. Whoever leaked his departure in the way they did, and for whatever reason, paid him back in very poor coin.
There’s no end in sight, it seems, to the financial crisis that started last summer. But how bad is it and what can we do to prevent another one? Prospect assembled a panel of top financial experts, including renowned investor George Soros, economic pundits Anatole Kaletsky and Martin Wolf, and Bank of England deputy governor John Gieve to discuss these questions. It considered who was to blame for the crisis, how much worse it may get, and how we can avoid asset bubbles blowing up in future.
The shock phase of the crisis may now be past, but the panel were sceptical about an early recovery, fearing that the conjunction of a banking crisis and a commodity boom may lead to stagflation (where growth slows while inflation rises) and this could cause a serious shock in the real economy. The financial authorities came in for some stick about the way the crisis was handled, and for being too slow to spot the dangers. Gieve, who was in charge of financial stability at the Bank of England (he has since announced he’s going to leave the post early), admitted the authorities would in future have to be far more intrusive in the way they regulated the financial system. Even poking around in banker’s pay packets (how much, and are they being paid in the right way?) is now something the watchdogs are thinking about.
Other panel members suggested more severe penalties for bankers who cause big losses by taking reckless bets. Soros even suggested they should be shot. There was general agreement that banks should be made to pay—perhaps through higher taxes—for the implicit guarantees they receive through the financial system that the authorities will bail them out if things go wrong. And there was a general feeling that it would be a good thing if the financial system shrank, although most doubted that it would do so. Lastly, looking to the future, the panel expressed some foreboding that this shock may prove to be insufficient to change behaviour. If that’s true, we may be on course for a mega-bubble that will, in Kaletsky’s words, “totally blow up the financial system.”
If in doubt, the Old Left would nationalise or regulate. If in doubt the New Right would privatise or deregulate. And if in doubt, the soupy left-right blend that now unites us has its own default option: quantify and publish.
Today The Guardian reports that the government is preparing to publish the death rates of patients undergoing major surgery at NHS hospitals in England. Boris Johnson won the London mayoralty with a promise to publish New York-style ‘crime maps’, detailing the areas of London that suffer from the worst crime.
The practice of tabulating and comparing ‘outputs’ has been growing in policy for a number of years now. The production of rankings is always the highlight of the World Economic Forum’s World Competitiveness Report, in which nations around the world are placed on a chart from the most competitive to the least. And New Labour has been infamous for its league tables, especially in education. The hope in such cases has been to create incentives to alter managerial strategy or try harder. Revealing a country to be the 35th most competitive in the world is meant to be a wake-up call for them to do better (unless it’s France), as well as to give businesses an indication of where not to invest.
This policy trick is now being performed for the benefit of individual citizens, thanks to two developments. Continue reading ‘On the probability of not dying’
Soaring food prices have been hitting the headlines. Wheat recently reached new records, but in real terms (after adjusting for general inflation) it has only recently recovered to the levels it traded at in the early 1970s. Indeed, between 1973 and 2000 the price of wheat dropped by 80 per cent. This time around it has already lost more than a third from its peak.
In a few dramatic days in April, the price of rice almost doubled, but it remains over a third below its all-time highs in 1971-72.
While remaining volatile, food prices can be expected to maintain high levels more consistently this time around. Emerging countries have much more spending power and are using it to consume more food. Between 1985 and 2007, China’s population trebled the amount of meat they ate, to 65m tonnes. That absorbed much of last year’s world increase in grain production to 2.1bn tonnes. 40 per cent of that was fed to animals rather than humans.
Biofuels took another 5 per cent, neatly offsetting the growth in output. Ironically, the rush to supplant petrol is itself putting pressure on oil prices: agriculture is one of the largest consumers of oil through fuel and power, transport and, particularly, oil-based fertilisers.
So we can look forward to high food prices over the coming years—although the price of a loaf of bread has already risen by far more than the cost of the wheat it contains.
A couple of news stories today help illustrate some of the more unexpected consequences of the vast price rises some commodities have experienced over the past few years—caused largely by increasing demand in the rapidly growing countries of the developing world. The New York Times reports that enterprising thieves in Leicestershire have been stripping rural churches of lead strips in their roofs. The motivation for these bizarre acts of theft is the sky-high price for lead on global markets; the metal is now worth seven times what it was just six years ago. (I’m reminded of a similar story a few years ago about a sudden epidemic in manhole cover theft in Britain and Ireland at a time of soaring prices for cast iron. In fact, a quick Google search reveals that the activity now seems to have spread to the US and Canada—and even to China.)
But more cheery news emerges from Helmand province in Afghanistan (now there’s a sentence you don’t read every day). Con Coughlin, the Telegraph’s man in Helmand writes on his blog that high prices for wheat have succeeded where Nato troops and the Afghan government have failed: in getting Afghan farmers to stop growing poppies, which are of course used as the basis for heroin. As Chris Haskins wrote in Prospect a few months ago, wheat prices have risen rapidly in recent years, caused partly by poor harvests and partly by a growing turn in developing countries towards the western diet. Now Afghan farmers want their share of the pie. And so while the spectacular rise in global wheat prices may raise the spectre of a “Malthusian crunch” in years to come, at least in the short term it’s weaning Afghanistan off its poppy addiction.
If Eugene Robinson’s op-ed in the Washington Post today somewhat states the obvious, it’s an obvious that needs stating: How are Obama and Clinton going to pay for universal health insurance if billions of dollars keep evaporating from the US economy? And how will old stalwart McCain fund his Hundred Years’ War in the middle east if Wall Street is in ruins? McCain recently admitted that “the issue of economics is not something I’ve understood as well as I should.” He is now, however, finding time to dip into Alan Greenspan’s book.
Various arms of government are tentatively beginning to ask what they can learn from behavioural economics. There seem to be two principle reasons for this. Firstly, there are various policies that aren’t quite achieving what is hoped of them because individuals aren’t responding to the incentives as neo-classical economics states they will. Then there are the various problems that government is lumped with - obesity being the most prominent one right now - which arise because of people taking ‘irrational’ decisions in the marketplace. Behavioural economics promises to integrate empirical psychology into the analysis of decision-making, though in doing so, threatens to make human behaviour impossible to model (as of course it actually is).
What is fascinating about this learning process is how ambivalent it is. Policy-makers want to learn useful lessons from behavioural economics, but not to learn sufficient lessons that the neo-classical edifice is fatally damaged. I was struck by this recently, when I came across this interesting paper by the National Consumer Council and the Better Regulation Executive, ‘Warning: Too Much Information Can Harm’ [pdf]. Page 24 contains the following proposal:
In many markets, government’s aim in providing regulated information is to inform consumers about their choices without steering them to any particular choice. By contrast, the work carried out by economists and psychologists suggests it is impossible to provide information or frame choice in an entirely neutral way… Attempts to render the information neutral can be counter-productive if they sterilise the information to the point in which it is no longer of relevance to the consumer.
Buried in here is a paradox: it turns out that treating people as rational utility-maximisers does not enable them to take rational, utility-maximising decisions. Instead, this report appears to be suggesting, government should recognise that they can only take a rational, utility-maximising decision if they are offered some help. All options are equal, but some are more equal than others. Continue reading ‘Hegelian consumer policy’
How good are the forecasters? 45 leading banks and other financial institutions ended 2007 having all failed to make an accurate guess at the 3.1 per cent by which GDP rose during the year. (The nearest was the treasury—thanks to its bracket figure of 2.75 to 3 per cent). All the others were too low. Similarly, not a single one forecast that the bank rate would end the year at 5.5 per cent. Although in mid-year many were predicting 5.75 or even 6 per cent, only one pencilled in a rate of more than 5.25 per cent back in January.
Only two got within 10 per cent of the current account deficit of £60bn—the great majority guessing more than 30 per cent too low, while every single forecaster overestimated the level of unemployment. The only relative success was on inflation: three quarters guessed to within a tenth of the actual 2.1 per cent.
Does it matter? Maybe not. But it may be a good idea to ask your experts what unforeseen events they have taken into account when examining the entrails.
The market now laps onto so many shores that it can be odd to remember the horror provoked by the first wave of Reaganomics. Lewis Hyde’s The Gift: How the Creative Spirit Transforms the World, published for the first time in 1983, was one of many efforts of that time that looked for non-market alternatives. The book became a word-of-mouth success, and was finally published in the UK this year in paperback. This made it eligible for the Prospect Reading Group’s November meeting.
Hyde, a professor of creative writing in the US, argues that in western society the balance between the gift and market economies has become too skewed in one direction. He does this by hopping from an anthropological theory of gift-giving to a detailed exegesis of Walt Whitman and Ezra Pound as examples of giftedness, with a look at the Protestant reformation along the way.
There is a charm in the eccentric path of the argument, and one understands the book’s appeal as a robust declaration of the right of things to be pursued for their own sake rather than for some ulterior purpose. One of the most depressing elements of modern life is the feeling that there is now no escape from a narrowly managerial view, in which everything is instrumental and nothing counts unless it can be measured.
The book has its disappointments, however. The parts do not work together as a whole, and it becomes obvious that Hyde is not going out of his comfort zone, sticking only to the literary arts and even then, only to examples that match his transcendent ideal. Hyde has a very particular Romantic view of creativity: for him, the artist is an untutored and inarticulate genius, and emotions are separated from critical thought by a very high wall. One can make room for creativity without relying on this old trope.
At least one of his case studies may not have stood the test of time. We’ve learned a lot more since about Walt Whitman who – far from being the unworldly poet – was a busy newspaper editor and entrepreneur who wrote favourable reviews of his own work under a pseudonym.
The most fascinating passages, to me, end up being about usury in the Middle Ages, and an afterword about the impact of the end of the Cold War on government support for the arts. The alternatives that Hyde proposes for support to creative work are original, and should be explored more widely.
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