The Lack of Correlation Between Economic Growth and Tax Rates

Another useful illustration of the point I made in this paper:

(source)

If you want to fight for lower tax rates, don’t say it’s because you want more economic growth. Say what you really mean.

Why Do We Need Human Rights? (36): The Economic Case Against Democracy

wealth in China

(source)

Democracy is a human right. But how do we justify this right? One common argument is that democracies tend to be wealthier than non-democracies. However, there’s some disagreement about this argument: not about the goodness of wealth and wealth-enhancing institutions, but about whether democracies are in fact such institutions. Impressive economic growth rates in non-democratic countries such as China have planted doubts in many people’s minds.

Some time ago, I offered a rather “philosophical” argument against the view that democracies perform worse economically than some types of authoritarian government (i.e. China-style). But in fact we’re dealing with empirically verifiable hypotheses here. So I looked for some numbers and found this article by Dani Rodrik:

The relationship between a nation’s politics and its economic prospects is one of the most fundamental – and most studied – subjects in all of social science. Which is better for economic growth – a strong guiding hand that is free from the pressure of political competition, or a plurality of competing interests that fosters openness to new ideas and new political players? …

Democracies not only out-perform dictatorships when it comes to long-term economic growth, but also outdo them in several other important respects. They provide much greater economic stability, measured by the ups and downs of the business cycle. They are better at adjusting to external economic shocks (such as terms-of-trade declines or sudden stops in capital inflows). They generate more investment in human capital – health and education. And they produce more equitable societies.

Authoritarian regimes, by contrast, ultimately produce economies that are as fragile as their political systems. Their economic potency, when it exists, rests on the strength of individual leaders, or on favorable but temporary circumstances. They cannot aspire to continued economic innovation or to global economic leadership. (source)

Some data on democracy and growth are here.

The darling of the “authoritarian=efficient” crowd is, of course, China. China has indeed performed extremely well economically under a rather authoritarian government. However, that government is much less authoritarian than it was during the post-WWII decades of stagnation and extreme poverty. So maybe it’s the relative move towards greater freedom that is the true cause of China’s economic performance, rather than its authoritarian government per se.

Moreover, China has done very well in terms of growth and poverty reduction, but in terms of levels of prosperity it’s still way behind most countries that are much more free. Its astounding progress is partly due to the very low starting point that was engineered by its authoritarian rulers.

And finally, the supposed economic success of authoritarianism in China – if it exists – isn’t necessarily proof of the economic ability of authoritarianism in general (authoritarian disaster stories are unfortunately far more common than authoritarian success stories). It may not even be proof of the economic ability of authoritarianism in China, since correlation doesn’t imply causation, especially not if there are only very few observations: China’s economic success may be due to other factors – and maybe this success would have been even greater without authoritarian government.

Jesus raises the dead man Lazarus back to the living world (mosaic from Ravenna, 500′s AD)

The economic case for authoritarianism is a bit like this: usually, people don’t return from the dead. But there’s this one guy, Lazarus, who did. Some claim that there was this other fellow, Jesus, who done the deed and made Lazarus walk again. There are no other Jesuses around, and this one Jesus only did his trick once. Nobody quite knows how he did it. Some say he just happened to be around when it occurred and people put one and one together. Lazarus would have walked anyway, perhaps even sooner had this other fellow not stolen all the attention.

More here, here, here and here on the myth of successful authoritarianism.

Related Articles

• The heavy hand (economist.com)
• Where will China’s long march end? (telegraph.co.uk)
• Is Democracy Necessary for Economic Success? (curiouscapitalist.blogs.time.com)
• India or China: Which Model for the Developing World? (curiouscapitalist.blogs.time.com)
• Democracy or Autocracy: Which is Better for Economic Growth? Becker (becker-posner-blog.com)

The Causes of Poverty (61): Geography

Rice plantation

(source)

It’s commonly accepted nowadays that a multitude of causes determines whether a country is relatively rich or poor. The fact that I’m currently writing post number 61 in this series points in the same direction. However, this means that it’s still possible for a particular cause to be dominant in certain countries, outweighing other existing effects. Some focus on institutions for example, others on geography. Let’s have a look at geography, and more specifically at the argument made by Jared Diamond. He cites some geological, geographical and climatological facts that do seem to have a large effect on national prosperity in certain countries:

• Tropical climates are notoriously unhealthy. There are more parasitic diseases in the tropics because the temperatures are never cold enough to kill parasites. Carriers of diseases, such as mosquitoes and ticks, are also far more diverse in tropical than in temperate areas. Furthermore, tropical diseases – compared to other diseases – are more difficult to combat with effective vaccines. There’s still no vaccine against malaria for instance. Disease is obviously a drag on economic growth: when large parts of a population are sick for extended periods of time, they are unable to work and trade efficiently. Furthermore, disease leads to high fertility rates – as an insurance against infant mortality – which in turn removes many women from the economy for a substantial part of their productive lives.
• Agricultural productivity is on average lower in tropical than in temperate areas. Temperate plants store more energy in edible parts such as seeds than do tropical plants. Plant diseases borne by insects and other pests reduce crop yields more in the tropics than in the temperate zones because the pests are more diverse and not subject to cold winters. The soils are also better in temperate climates (rainfall washes away the nutrients in tropical soils, and these soils are older and not renewed by glaciers).
• Landlocked countries are at an economic disadvantage: if an area is accessible to ships because it lies either on the sea coast or on a navigable river, then trade is easier and less costly: it costs roughly seven times more to ship a ton of cargo by land than by sea. Hence, landlocked countries profit less from the advantages of trade.
• Similar advantages are shared by countries that have abundant reserves of natural resources such as fresh water, forests, minerals, fuels etc. (Although dependence on natural resources can also be a curse).

This being said, there is no overwhelming correlation between national wealth and geographic conditions that supposedly promote wealth: there are countries that are more prosperous than they should be given their geographic endowments, and vice versa. Other factors must therefore play a part, most notably institutions.

More posts in this series here.

The Causes of Poverty (54): Lack of Trade Liberalization

I mentioned before (here and here) that trade liberalization – the removal of trade barriers such as tariffs, subsidies and other distortions of international trade – is, on aggregate and in the medium term, a powerful mechanism for poverty reduction. I say “in the medium turn”, because some structural adjustment may be necessary, and “on aggregate” because some may lose while others gain.

The usual fears about trade liberalization – that it reduces government revenues necessary for redistribution, that it leads to labor competition, lower wages and higher unemployment rates, or that it raises prices in developing countries – are, in general and on aggregate, unfounded (an overview of the evidence is here). Of course, trade liberalization may cause local economic shocks, and there can be distributional effects: some people will benefit more than others, and some may even be worse of after liberalization, especially in the short term. But it’s the aggregate medium term effect on a country or an economy that counts.

This is similar to the positive effect of economic growth on poverty reduction:

The vast majority of the world’s poor live in the rural areas of these two countries [China and India]. Both countries achieved significant reductions in poverty during 1980–2000 when they grew rapidly. According to World Bank estimates, real GDP grew at an annual average rate of 10 percent in China and 6 percent in India during these two decades. No country in the world had as rapid growth as China, and fewer than ten countries exceeded the Indian growth rate. The effect on reduction in poverty in both countries was dramatic, entirely in keeping with the “Bhagwati hypothesis” of the early 1960’s that growth is a principal driver of poverty reduction. (source)

Not all of the poor will be automatically better of as a result of economic growth, and growth may widen income inequality or relative poverty while reducing absolute poverty. But on average and on aggregate, economic growth – like trade liberalization - reduces poverty. That’s not just a story of “trickle down” or “all boats rising on a rising tide”; economic growth also means that the government has more resources to fund welfare and redistribution. (Obviously, none of this implies that growth is always beneficial or that there isn’t room to make growth even more “pro-poor” than it already is).

Arguments in favor of trade liberalization

The interesting part of the argument is that the positive effect of trade liberalization on poverty reduction passes through enhanced economic growth: liberalization reduces poverty because it enhances growth.

[P]ractically no country that has been close to autarkic has managed to sustain a high growth performance over a sustained period. Furthermore, … if one classifies countries into globalizers and nonglobalizers by reference to their relative performance in raising the trade share in GNP during 1977–1997, the former group has shown higher growth rates… [T]he outward-orientation of the Far Eastern strategy … led to the Asian miracle. (source)

Free trade is one of the determinants of economic growth. Growth requires increased productivity, and that’s what free trade delivers. Free trade means more productivity because it means

• more specialization
• more use of comparative advantage
• better access to technology and knowledge
• better and cheaper intermediate goods (raw products etc.) and capital goods (machines etc.)
• benefits of scale
• and increased competition.

All these consequences of free trade have a positive effect on productivity and hence on growth. And that’s not just theory; there’s empirical proof. Reductions in trade barriers were almost always followed by significant increases in productivity (source).

And it’s not just productivity; trade liberalization has other effects as well. The removal of tariffs can reduces prices for consumers and hence reduce poverty. It’s often the case that goods consumed by poor people have a higher tariff tax than goods consumed by rich people:

In his research, [Edward Gresser, senior fellow and director of trade policy at the Progressive Policy Institute] found that the tariff rate on a cashmere sweater is 4 percent; the rate for one made of much cheaper acrylic is 32 percent. A silk brassiere has a tariff rate of less than 3 percent, but the rate on a polyester one is slightly less than 17 percent. The tariff rate on a snakeskin handbag is just over 5 percent but climbs to 16 percent for one made of canvas. Similar variations occur when it comes to household goods. Drinking glasses that cost more than $5 each have a tariff of 3 percent, while those that cost less than 30 cents each have a rate of 28.5 percent. A silk pillowcase has a rate of 4.5 percent; this goes up to nearly 15 percent for one made of polyester.

Overall, clothes and shoes contributed nearly $10 billion in tariff revenue in 2009, while higher-cost items including audiovisual equipment, computers and even cars added less than $2 billion. Gresser contends that the $10 billion is disproportionately borne by people who can’t afford to buy luxury goods. What’s more, when customers pay sales tax on these products, that amount is also higher than it would otherwise be thanks to the tariff that drives up the retail price. (source)

Hence, not only does free trade alleviate poverty, trade restrictions and protectionism actually aggravate poverty. Take also the example of restrictions on rice exports in rice-producing countries:

At first glance, this seems understandable, because a country may not wish to send valuable foodstuffs abroad in a time of need. Nonetheless, the longer-run incentives are counterproductive. (source)

When farmers can’t export, there’s little incentive for them to farm rice. Result: the shortages that were meant to be avoided.

Arguments against trade liberalization

However, we shouldn’t lose sight of the undisputed downsides of trade liberalization. The removal of subsidies can hurt certain producers and it can, especially in the short run, depress employment and wages in certain sectors. It can therefore reduce some people’s incomes and push them into poverty. Trade liberalization can destroy entire markets: it can force a country to abandon tomato production for example, because nonsubsidized local producers are no longer able to compete with increased import competition coming from countries with a comparative advantage. The local producers will lose their jobs and income. However, these same people may benefit in other areas: products which they consume may become cheaper. So, when assessing the impact of trade liberalization on poverty, one has to aggregate all the losses and gains in different areas, and that’s ultimately an empirical question that has to be investigated country by country. Overall, the evidence is that, on aggregate, the effect is probably positive.

There can be individual losers from liberalization, and even individual countries can lose: countries that depend on mineral resources, for example, can take the fast lane towards the resource curse when trade is liberalized. But it’s the global balance of poverty alleviation that determines the desirability and success of trade liberalization.

The claim that liberalization negatively affects government revenues because of decreasing income from tariff taxes, and hence diminishes the generosity of the welfare state, is also not well founded. First of all, liberalization also means reduced subsidies, which should improve governments’ fiscal situation. Secondly, trade volumes increase as tariffs are reduced, and hence the net effect of reducing tariffs doesn’t have to be falling revenues. And finally, even if revenues fall, the poor don’t necessarily have to suffer: it’s ultimately a political decision where to spend which types of government revenues. Priorities can change when revenues change.

Another possible disadvantage of free trade is a cultural one. The claim is that free trade means cultural imperialism: small cultures don’t have the resources to export their cultural products and risk being overwhelmed by, in particular, American culture. Hence, there may be a case for cultural protectionism, but this case doesn’t extrapolate to protectionism writ large.

Conclusion

Liberalization isn’t a magic bullet, neither for economic growth nor for poverty alleviation. Sustained growth and substantial long term poverty reduction require more than free trade. Conflict resolution, good governance, education etc. need to accompany liberalization. It’s no secret that we don’t yet fully understand all the determinants of growth and poverty reduction. The advantage of trade liberalization, compared to other possible pro-growth or pro-poor policies, is that it’s relatively easy to implement: it is – or should be – easier to abolish tariffs and other trade restrictions (especially if there’s an element of reciprocity in global negotiations) than to create a solid education system or a non-corrupt judiciary able to enforce market rules and property rights.

The evidence in favor of the pro-poor effects of trade liberalization is compelling, but we shouldn’t underestimate some measurement difficulties: the measurement of poverty, of trade liberalization and of the effect of the latter on the former is by definition imprecise. The concept of trade liberalization may also be too broad or too vague. And the specific outcomes of liberalization policies depend not only on the precise reforms being undertaken, but also on the context in which they are undertaken. The same measures will have different results in different economic environments. The extent of multilaterality also determines the effects.

Read more on the topic here, here and here. More posts in this series are here.

Related Articles

• Q&A: Stopping the Slide Into Poverty (blogs.wsj.com)
• Global reform of trade policy will reduce poverty? (iipalbanjary.net)
• Further trade liberalization urged (search.japantimes.co.jp)

The Causes of Poverty (53): Poor Economic Growth

“Wall Street in Panic” from 1929. Photograph: Hulton Archive/Getty

As an update of this previous post, here’s some more information about the nature of the relationship between economic growth and poverty reduction.

In a recent paper, Lane Kenworthy has compared growth and income data for 17 developed countries. Specifically, he looked at the ways in which the incomes of people in low to middle income groups benefit from economic growth. “Growth” here means increases in the amount of per capita GDP – this caveat is necessary in order to filter out economic growth that is the result of population growth and that doesn’t make the average person better off (although it obviously can make some persons better off, immigrants for instance). “Income” includes both wages and welfare benefits or other government transfers. Another preliminary remark: it’s wrong to think that growth automatically and by definition makes everyone – and hence also the poor – better off. It just makes the average person better off. That means that it can also in some circumstances make some people – e.g. the poor – worse off. Growth numbers are silent about the distribution of the effects of growth.

The question which the paper tries to answer is the following. Given that poor people can benefit from economic growth in two ways:

1. either growth “trickles down“: more aggregate national income or production means more jobs, better paid jobs etc.
2. or growth can increase the government’s tax base so that the welfare system can be made more generous,

which of these two mechanisms has been most prominent in the 17 countries examined in the paper?

The answer is “number 2″. Why? Well, in some of the selected countries economic growth was accompanied by a significant rise in low-to-middle household incomes, while in the other countries the effect of economic growth on the incomes of people in low-to-middle income groups was much smaller or zero. If economic growth trickles down (1), then one would assume it trickles down in all or most countries. After all, if growth results in more and better paid jobs for the poor, then there’s no a priori reason why this result would occur in one country but not in another.

The nature of government transfer systems is the reason why the effect of growth on the incomes of the poor is not the same in all countries:

when households on low incomes got better off, it was due most often to a rise in net government transfers. Where net transfers increased, incomes tended to increase in concert with economic growth. Norway, the UK, Sweden, Finland, and Denmark illustrate this pattern. Where net transfers were stagnant, income trends were decoupled from growth of the economy. We observe this in the United States, Canada, and Switzerland. This is an important finding. It means that, as a general rule, growth has not trickled down to low income households through wages or employment. And it means that, when government transfers haven’t grown, wages and employment haven’t stepped in to take their place. (source)

Looking at all this from the perspective of the causes of poverty: it’s clear that poor economic growth in wealthy countries cannot, by itself, explain poverty, because these countries can witness both growth and stagnation of the lowest incomes (as a result of their failure to implement the necessary transfer programs). Hence you can have growth without poverty reduction. If lack of growth is the main cause of poverty, then growth would by itself and automatically reduce poverty. We see that this is not the case.

In poor countries, on the other hand, growth can perhaps be sufficient. Those countries start from a lower base and more can trickle down. A lack of growth can, therefore, explain the persistence of poverty in developing countries, but probably not in developed countries. The latter have a basis of wealth that is large enough to fund welfare programs even if growth is poor. Growth helps to make this funding easier, but it’s not really necessary. A more progressive tax system, coupled with some good legislative will, can also do the trick.

More here.

The Causes of Poverty (44): Bad Institutions

(source)

Botswana is a largely tropical, land-locked country with insignificant agriculture in a geo-politically precarious location. When the British granted independence, they left 12 km of roads and a poor educational system. Making headlines for its devastatingly high HIV rate, Botswana suffers from high inequality and unemployment. Officially a democracy, it has yet to have a functioning opposition party. 40% of Botswana’s output is from the diamond industry, a condition that in other countries casts the resource-curse.

Zimbabwe and Botswana GDP per capita

Still, Botswana is a growth miracle. Between 1965 and 1998, it had an average annual growth rate of 7.7%, and in 1998 it had an average per capita income four times the African average. Rule of law, property rights, and enforcement of contracts work; the government is efficient, small, and relatively free from corruption. Indigenous institutions, persisting through colonization, encourage broad-based participation, placing constraints on elites. Institutional quality and good policies are responsible for success against the odds. (source)

Of course, high GDP growth rates don’t always imply low poverty rates, but often they do. About a third of the population still lives in poverty, but this rate has been declining sharply, from 59% in 1985 and 47% in 1992 (source).

(image source)

More posts in this series are here.

Human Rights Maps (99): Economic Freedom

First, why is economic freedom a human rights issue? The most important reason perhaps is that there is a correlation between economic freedom and GDP growth, and GDP growth or economic growth in turn is a prerequisite for the fight against poverty. (If you’re wondering why poverty is a human rights issue, go here). Secondly, international economic freedom, or free trade, also helps to alleviate poverty. And, finally, there is a link between economic freedom and freedom more generally: economic freedom goes hand in hand with property rights, the rule of law and democratic transparency which are all human rights issues.

There’s an interactive map here with an index of economic freedom by country (methodological information is here). This is a screenshot:

(source, click image to enlarge)

More human rights maps here.

Related Articles

• Recession drove down economic freedom: study (ctv.ca)
• Recession caused global decrease in economic freedom: Report (canada.com)
• Ontario’s growth slowed by low economic freedom, think-tank says (canada.com)

Why Do We Need Human Rights? (18): The Economic Case Against Human Rights

Some more comments following two previous posts on the topic (see here and here).

Do human rights promote or depress economic growth and prosperity? (I’ll focus on non-political rights for the moment because political rights – i.e. democracy – have very specific effects on the economy). The economic case against human rights could go something like this. Economic growth would be enhanced by different policies and actions that imply violations of human rights. E.g.

• Killing criminals instead of incarcerating them would make substantial resources available for more productive investments.
• The same is true for the resource that go into running legal and criminal judiciary systems that correspond to human rights requirements (e.g. high burden of proof, appeals systems, legal representation etc.). More about those requirements here.
• Human rights, and specifically those regulating the judiciary, make it more likely that suspects who have indeed committed a crime are set free, which imposes an economic cost on society.
• Killing the poor, the sick and the elderly rather than helping them would likewise liberate resources for more productive use.
• Less extremely, assisting the poor, the sick and the elderly means creating a large government and a heavy tax and regulatory burden. These are detrimental to entrepreneurship and business because they are disincentives for wealth creators. When wealth creators are burdened, prosperity suffers. (More here).
• Social and economic human rights such as a right to strike, to a decent wage, limited working hours etc. undermine productivity and hence prosperity.
• Etc.

Let’s assume, for the sake of argument, that all these effects are real and not compensated by

• positive economic effects of respect for human rights
• other, negative economic effects of violations of human rights, or
• long term disadvantages following the possible short term advantages of rights violations (the fear, distrust and uncertainty resulting from some if not all of the claimed economic advantages of the rights violations that I just cited would likely harm long term prosperity).

Then you still don’t have a watertight case against human rights because people may still be willing to pay the economic price for respect for human rights. They may prefer to have their rights respected even if that has economic costs.

But, of course, that assumption doesn’t hold. The possible economic benefits of rights violations are easily offset by their costs and by the benefits of respect for human rights. Ultimately, the question of the effect of respect for human rights on the economy is an empirically verifiable hypothesis: we have data on economic performance, and – to some extent – on rights performance. It’s just a matter of linking the two. There’s an interesting paper here trying to do just that. The conclusion:

Our results show that high degrees of human rights are conducive to economic growth and welfare in a significant manner.

Through which channels is this effect supposed to operate? There are a few candidates:

• Physical security is a necessary precondition for the productive use of one’s resources and property.
• Property rights and the rule of law – both are human rights (see here and here) – are necessary for the effective operation of free markets, and free markets promote growth. Neither the rule of law nor property rights are safe in authoritarian regimes: why would a government that imposes physical harm respect property rights?
• Countries don’t attract Foreign Direct Investments (FDI) when they have a poor human rights record, rampant insecurity, ineffective rule of law and protection of property rights, poor labor conditions and the worker unrest that it implies etc. Stability, predictability, peace and calm lead to investment. Investment in rights abusing countries can also harm companies domestically when consumers revolt against the foreign conduct of their national companies.
• Education is a human right, and investments – especially FDI – usually follow the trail of education. Education is typically considered growth enhancing.

The discussion should separate between growth and levels of prosperity. There is an obvious correlation between respect for rights and levels of prosperity: the most prosperous countries in the world are also those where respect for rights has achieved a higher level. The case that growth rather than level of prosperity is also correlated with respect for human rights seems a lot harder to make, given the high growth levels of countries such as China. The argument could be that respect for rights promotes but is not a necessary condition for growth. Or it could be that authoritarian countries with high growth rates would have had still higher rates had they respected rights to a higher degree. Such a counterfactual is of course very hard to measure.

So, it’s not just that richer countries can start to afford human rights (to some extent that’s true, because rights cost money); it’s also the case that respect for human rights leads to higher wealth. There’s a two-way causation at work here.

The Ethics of Human Rights (29): Should Taxation Be a Tool For Economic Efficiency or For Social Justice?

(source, source)

Taxation is a recurring theme in political discussions between people of the left and right. People of the left see taxation as a tool for social justice. They tend to prefer rather high taxation rates and a progressive taxation system:

• High taxation rates bring in revenues that are large enough to enable the government to spend on programs and transfers that are designed to promote social justice: unemployment benefits, poverty reduction policies, education, healthcare etc.
• Progressive taxation rates are just because they impose relatively (and not just absolutely) higher taxes on people who are more able to pay, and, in addition, reduce income inequality and hence realize another goal of social justice.

People on the right usually favor low tax rates and a non-progressive taxation system (either a proportional system in which everyone pays the same share of their income, or a regressive system in which everyone pays more or less the same amount in taxes). Rather than on social justice, they focus on the economic effects of taxation.

• They reject high taxation rates because they claim that these high rates discourage people and are a disincentive to hard work, effort and investment. Because high rates limit effort and investment, they also limit productivity, innovation, international competitiveness and job creation.
• They also reject progressive tax rates because high tax rates for high incomes discourage those people who work relatively hard (they work hard supposedly because they earn a lot) and who are most likely to innovate, to be productive and competitive and to create jobs.
• However, they don’t necessarily favor regressive taxes because they are equally hostile to high tax rates for low income people, albeit for other reasons. High taxes for low income people discourage them from entering the labor market and hence inflate unemployment. Still, they claim that the worst damage is done by high taxes on the higher incomes, which is the reason they reserve particular scorn for progressive taxation systems. Because high tax rates for the wealthy punish the most productive elements in a society, the whole of society suffers. More productive people will limit their productivity because they don’t want to fall into a higher tax bracket, and the money they pay in taxes can’t be invested in the economy. High tax rates, especially for the rich, have an unacceptable cost in terms of economic efficiency. Keeping taxes low, on the contrary, and allowing wealthy people to use their money in the economy, will ultimately benefit everyone (this is the so-called Trickle-Down theory).

Of course, this distinction between left and right is a caricature. Most people on the left are also concerned about economic efficiency, and most on the right are not insensitive to questions of social justice. The extremes are hardly ever encountered in real life: no one wants to limit taxes to such an extent that economic efficiency is promoted but no money is left for justice, and no one wants to put tax rates at such a high level that there is ultimately no more economy to tax. (The latter concern is expressed in the famous Laffer Curve arguing that beyond a certain level of tax rates government revenues in fact decrease instead of increase. At very high rates there is no longer any incentive for a rational taxpayer to earn any income and hence tax revenues will decline while tax rates increase. However, it isn’t clear what “very” in the previous sentence actually means and where exactly the tipping point is situated).

Graphically, we can represent this in the following image:

Normal political discourse takes place in the light-gray area.

Personally, I believe that the concerns of both right and left are justified and need to be balanced, and that too much focus on either the element of efficiency or justice is detrimental to the other element. On the one hand, there’s only so much money a government can raise without wrecking the economy, and justice isn’t only about spending money (there can even be perverse effects such as unemployment traps, welfare dependency etc.). On the other hand, there’s only so much an efficient economy can do to realize social justice all by itself and quasi-automatically (remember the invisible hand…). To quote Matthew Yglesias’ sarcastic comment on the skyrocketing incomes of the U.S. top 400 earners in the decades leading up to the 2009 recession:

As is well-known, the Top 400 are considerably more talented than the rest of us. And [the] decline in their tax rates has created exciting new incentives for them to apply their talents. And that, in turn, is why the 2000s were a so much more economically successful decade than the 1990s, not just for the Top 400 but for the rest of us as well. Thanks to their skyrocketing incomes and falling tax rates, we’re currently [during the 2008-2009 recession, FS] all enjoying the fruits of prosperity, rapid growth, and low unemployment. Thanks rich guys! (source)

A similar sentiment is expressed in this clip from the Daily Show (I’m unable to embed it; skip to the 4th minute or so).

Here’s one very specific example of the way in which taxation can promote social justice:

Again, personally, if I lived in the U.S., I would probably be on the left side of the arrow in the efficiency v justice graph above, since I believe taxes in the U.S. are relatively low and can be raised without too much harm to economic efficiency. The resulting government revenues could then be spent on improving the social safety net and promoting social justice. It’s difficult to imagine for a European that a country such as the U.S. doesn’t offer health insurance to millions of its citizens. Also, unemployment benefits are quite stingy in the U.S., both in terms of eligibility and duration: only one third of the unemployed qualify for benefits and only for 26 weeks (extendable during recessions if the Republicans don’t object, as they infamously did beginning of 2010):

share of unemployed receiving benefits in the US

(source)

The system of unemployment benefits could easily be improved without perverse effects or harm to economic efficiency. And there are other areas of possible improvement as well.

However, as a European in Europe, I think I’m probably more to the right of the graph since there’s a strong argument that the social safety net in Europe (at least in some countries) has harmed European competitiveness, labor market participation and innovation.

Still, is there evidence of this? What do the data say about high tax rates harming economic efficiency, in Europe and in general? Is the conservative case against taxes as strong as it seems? I’m afraid not. In this previous post, I already presented some evidence that the effect of reasonably rather than extremely high rates on economic efficiency is minimal at best. I now present some more evidence from Lane Kenworthy about the U.S. and other affluent countries (always keeping in mind that correlation doesn’t imply causation and that the absence of a large negative effect of high taxes doesn’t preclude the possibility that lower taxes would have had a large positive effect). One measure of economic efficiency is economic growth. If we plot economic growth rates for the U.S. against tax rates for the wealthy we get the following picture:

effect of tax rates on economic growth in the US

(source)

If anything, higher tax rates lead to more growth. But of course there can be catch-up effect: higher rates producing their effects only years later. That’s taken into account in the following graphs, which also show that an international comparison doesn’t prove that countries with higher tax rates have lower growth:

effect of tax rates on economic growth international comparison

(source)

If we have a look at the data about the effect of high tax rates on unemployment (another conservative concern), we also see that we shouldn’t panic about taxes:

effect of tax rates on unemployment international comparison

(source)

Now, if there is no good reason not to tax at a moderately high level, based on concerns about economic efficiency, the question remains whether there is a good reason to tax based on social justice reasons. Given the caveat that social justice isn’t all about government spending (I argued here that it is primarily about something else) and that such spending can in some cases have perverse effects (see above), I do believe that some spending is necessary in some cases, and that relatively high tax rates are necessary to produce the revenues required for this spending.

Again following Kenworthy, I believe that relatively high tax rates are acceptable and even necessary to create the revenues required for social justice policies, but that progressive tax rates in themselves don’t do the job of reducing income inequality, contrary to what is often claimed as a justification for progressive rates. That doesn’t mean that we shouldn’t reduce income inequality (it’s quite high in the U.S.) – there are good reasons to try. It just means that progressive taxation in itself won’t do the job. The important thing is to have high tax revenues which can then be spent in transfers and services that reduce income inequality and achieve other goals of social justice. Yet, I still think a progressive system is required, not because of its supposed effects but simply because it is just in itself, compared to proportional or regressive systems. A person with more income can afford to pay, not merely more in an absolute sense but more in the sense of a larger share of his or her income.

More posts in this series are here.

Measuring Poverty (9): Absolute and Relative Poverty Lines

There are many ways you can measure how many people in a country are poor. Quite common is the use of a so-called poverty line. First you decide what you mean by poverty – for instance an income that’s insufficient to buy life’s necessities, or an income that’s less than half the average income etc. Then you calculate your poverty line – for instance the amount of income someone needs in order to buy necessities, or the income that’s half the average income, or the income of the person who has the tenth lowest income if the population was one hundred etc. And then you just select the people who are under this poverty line.

I intentionally chose these examples to make a point about absolute and relative poverty. (I thinks it’s important to distinguish types of poverty and different definitions of poverty). In the U.S., people mostly use an absolute poverty line, whereas in Europe relative poverty lines are used as well. As is clear from the examples above, an absolute poverty line is a threshold, usually expressed in terms of income that is sufficient for basic needs, that is fixed over time in real terms. In other words, it’s adjusted for inflation only and doesn’t move with economic growth, average income, changes in living standards or needs.

A relative poverty line, on the other hand, varies with income growth or economic growth, usually 1-to-1 since it’s commonly expressed as a fixed percentage of average or median income. (It obviously can have an elasticity of less than 1 since you may want to avoid a disproportionate impact on the poverty line of very high and very volatile incomes. I’ve never heard of an elasticity of more than 1).

Both absolute and relative poverty lines can be criticized. Does an absolute poverty line make sense when we know that expectations change, that basic needs change (in contemporary Western societies, not having a car, a phone or a bank account can lead to poverty), and that the things that you need to fully participate in society are a lot different now than they once were? We know that people’s well-being does not only depend on the avoidance of absolute deprivation but also on comparisons with others. The average standard of living defines people’s expectations and when they are unable to reach the average, they feel excluded, powerless and resentful. Can people who fail to realize their own expectations, who lose their self-esteem, and who feel excluded and marginalized be called “poor”? Probably yes. They are, in a sense, deprived. It all depends which definition of poverty we can agree on.

It seems that people do think about poverty in this relative sense. If you compare the (rarely used) relative poverty line of 50% of median income in the U.S. with the so-called subjective poverty lines that result from regular Gallup polls asking Americans “how much they would need to get along”, you’ll see that the lines correspond quite well:

(source, click on the image to enlarge)

So if relative poverty corresponds to common sense, it seems to be a good measure. On the other hand, a relative poverty line means moving the goal posts for all eternity. We’ll never vanquish relative poverty since this type of poverty just moves as incomes rise. It’s even the case that relative poverty can increase as absolute poverty decreases, namely when there’s strong economic growth (i.e. strong average income growth) combined with widening income inequality (something we’ve seen for example in the U.S. during the last decades). (Technically, if you use the median earner as the benchmark, relative poverty can disappear if all earners who are below the median earner move towards the median and earn just $1 or so less than the median. But in practice I don’t see that happening).

Some data on relative poverty in developed countries:

relative poverty, cross country comparison

(source, the relatively dismal number for the U.S. is partly due to very high incomes at the top)

More posts about poverty measurement are here.

The Ethics of Human Rights (27): The Human Rights of Future Generations and Poverty

I’ve argued many times before that poverty is a human rights issue, so I won’t do that again (you can read this or this for example). For those who are not convinced, just assume arguendo that I am right, otherwise the rest of this post won’t make a lot of sense. I’ve also presented my views on the types of duties produced by the human right not to suffer poverty, and on the moral agents that carry those duties: is it a face-to-face thing, or does the government have a role to play by way of redistribution and the welfare state? Etc. You can read about this here and here for instance, so that’s something else I won’t repeat.

I do believe the welfare state is an important institution because it can fill the gap left by deficient private charity. But my view is that private charity should come first and should be promoted. The welfare state should be a fallback option rather than the starting point. So I guess I don’t think it’s as important as people from the left usually think it is. In order to bolster my view, I can point to some problems with the welfare state. In fact, it can be argued that the welfare state is another case of a self-defeating human rights policy, in the sense that it reduces poverty but at the same time produces poverty. Tyler Cowen, in a very interesting paper, has argued that while the welfare state does indeed reduce the levels of poverty of those people currently living (at least if we focus on the level of the state and forget the global impact of the operation of a welfare state in a particular country), it also has a negative impact on the poverty of future generations.

The argument goes as follows. It’s reasonable to accept that economic growth lifts people out of poverty (see also here) and that the welfare state lowers the rate of economic growth, perhaps not by much annually but small reductions of economic growth over several years may amount to a large cumulative reduction. Now, how does the welfare state lower the rates of economic growth? There are at least four effects:

[1] A welfare state will cause some people to substitute welfare dependency for private work, thus lowering the number of individuals in the active work force or causing them to work less hard. … The poor could be engaging in more productive exchange with other individuals in the economy, but to some extent they desist, for fear of losing welfare benefits. …

[2] The taxes used to support the welfare state discourage taxpayers from working or otherwise creating economic value. …

[3] The extensive welfare states of Western Europe typically are bundled with labor market protections and interventions. It is not politically or economically feasible to give the non-working significantly more risk protection than the working. Western European welfare states therefore tend to create a privileged class of working “insiders,” with high real wages, high benefits, and near-guaranteed positions of employment. This practice, of course, lowers the number of new jobs that are created, limits labor market mobility, and raises unemployment.

[4] [The welfare state] causes the economy to develop new technologies and new ideas at a slower rate. … A welfare state will plausibly have a negative effect on innovation. By withdrawing individual labor from the productive sector of the economy, the rate of discovery is likely to fall. Both the poor and the taxpaying non-poor will work less when a welfare state is in place [see 1 and 2 above]. If we think of research and development, broadly construed, as one kind of work, we can expect the rate of growth to decline. Even if the poor do not participate in ideas production directly, they do so indirectly. To provide a simple example, to the extent it is harder or more costly to hire good janitors, and other forms of cheap labor, fewer research laboratories will be opened. … The welfare state permanently discourages various individuals from contributing to technological development and thus lowers the rate of economic growth in lasting fashion. (source)

One can argue about the importance or even the existence of these four effects, and there may even be counter-effects (welfare recipients may move in the underground economy, unemployment may lead to better parenting and hence better education etc.). But even if the effects are small, it’s sufficient to spread them towards the very long term future in order to produce a lowering of the economic growth rate and an increase in future poverty. Given that the future contains an infinitely large population, the welfare state will always produce more poverty than it eliminates (given that the current population and hence also the current poor are a limited number). That would mean that the concept of the welfare state is doomed. And if that’s the case, it would seem I have proven too much (I merely wanted to buttress my argument that the welfare state should come second, after private philanthropy).

However, I don’t think it’s obvious that we should value the rights of future people the same way as the rights of existing people. After all, these future people may never come into existence. If we try to protect their welfare by giving up the welfare state, we will harm real people for the rights of people who may never exist. Furthermore, the future may bring a novel solution to the poverty problem.

More about the rights of future generations. More about the related topic of population metrics. More posts in this series are here.

Why Do We Need Human Rights? (12): The Economic Case against Human Rights and Democracy, Ctd.

After completing my older post on the topic – in which I argued that the case is very weak – I found this quote by Bill Easterly which I thought would illustrate my point:

Democracy doesn’t attract as much love as it deserves in aid and development circles. Many wonder if benevolent autocrats might be better for development than messy elections, even though there is no evidence to support benevolent autocracy. There is a strong positive association between democracy and LEVEL of per capita income, which at least some authors argue is causal. (It’s true there is no robust association between democracy and GROWTH of income, but then there is no robust association between GROWTH and ANYTHING.) But even if there had been SOME material payoff to autocracy, why don’t we care more about democracy as a good thing in itself? (source)

Some data about the correlation between democracy and GDP (both level and growth) are here. My argument for democracy is usually instrumental (see here) and prosperity is one of the values that can and should be promoted by instrumental democracy. But I’ve also written about democracy as a good thing in itself. Go here if you care about that sort of argument.

Measuring Poverty (5b): Poverty in Africa

Here‘s an interesting paper by Sala-i-Martin and Pinkovskiy on the evolution of poverty in Africa, and it contains exciting news: African poverty is falling and is falling rapidly since 1995 (this contradicts some older research). Moreover, this evolution is remarkably general across African countries, and not just explained by good news in a few large countries. Poverty is falling even in countries which are believed to burdened by geography, bad agricultural prospects, a history of slave trade, war, or lack of natural resources. And, to make the good news complete: income inequality has also decreased, and the Millennium Development Goal of halving the proportion of people earning less than $1 a day will be achieved on time.

You can see the reduction of the poverty rate in Africa in the graph below. From a “high point” of almost 45% of the population surviving on less than $1 dollar day in the late 1980s, that rate has fallen to 32% in 2006. How come? As you can also see in the graph, at the time poverty began to decline around 1995, GDP began to grow (after three decades of zero or negative growth). The graph shows a striking correlation between poverty reduction and economic growth, something I have written about before in another context, see here and here).

(source)

Of course, poverty reduction isn’t the automatic result of GDP growth only. Other factors are at work as well, but the paper is silent about those.

What’s interesting is that this African growth spurt since 1995 (probably briefly interrupted by the current recession) isn’t just caused by growing oil prices. If that had been the case, we would have seen increasing income inequality, since revenues from the oil industry are typically appropriated by elites. But that’s not the case. Poverty reduction has gone hand in hand with a reduction in income inequality. You can see the extent of this reduction in the following two graphs from the paper:

(source)

This means that growth has benefited the poor. However, although the reduction in poverty is impressive, it’s not quite as impressive as poverty reduction in China.

More on poverty measurement. More poverty statistics. More on Africa.

Why Do Countries Become/Remain Democracies? Or Don’t? (9): The Resource Curse

I’ve written before on the reasons why countries develop or fail to develop more democratic forms of government. See here and here. That’s because I believe democracy is a human right that serves numerous important values. If we agree on this, it’s interesting to know

• how societies have achieved the transition from authoritarian forms of government to more democratic ones
• why other societies have failed
• and how democracies have avoided the opposite transition.

This knowledge will help us to promote and sustain democracy in the future. Something we already know is that this isn’t simple. There are a huge number of factors at play and there’s no silver bullet. Some of the most widely discussed factors are economic development, levels of education, and religion and culture.

I’ll bracket two important issues here: what kind of democracy are we talking about, and how do we measure transition or development towards democracy? If you want to know what promotes or inhibits democracy and act on this knowledge in order to further the cause of democracy, you can’t avoid these questions, but discussing them here would take us too far.

Flaring natural gas from oil fields is a common sight and dominates the skyline in the Niger Delta

What I want to focus on here is the so-called resource curse. This curse is believed to be a phenomenon that blocks countries’ development towards democracy. Promoting democracy means lifting the curse. Now, what is this curse, and is it real or just another simplistic explanation of the course of history?

Countries which own lots of natural resources such as diamonds, oil or other valuables that are found in the ground, are often relatively poor, badly governed, violent and suffering from gross violations of human rights. Resource wealth can trigger corruption and grabbing, can give autocrats the means to retain power by buying off opposition or building a repressive state apparatus, or can tempt democratically elected leaders to cling to highly beneficial positions of power.

As I’ve already said, this may be a nice story but even a cursory glance at reality reveals some counter-indications. There are many resource rich countries that are governed very well and are pinnacles of democracy (take Norway). Still, that may only disprove part of the resource curse. It may be the case that democracies benefit from resources and are able to solidify themselves, while non-democracies are doomed to remain as they are because of resource abundance. Resources then only create a curse when democratic institutions are absent. So we shouldn’t worry about democracies failing because of resources, but about autocracies failing to transform because of them.

However, there’s an article here claiming that

resource wealth is positively associated with both economic growth and institutional quality.

Much depends, it seems, on how to measure resource abundance. There also is a reversal of the direction of causation, a common mistake in statistics:

There is no evidence that resource-dependent countries end up with slow growth and bad institutions. Rather, countries with bad institutions attract little investment, and as a result they grow more slowly and remain dependent on exports of commodities.

(source for the image of Nigeria)

Why Do We Need Human Rights? (11): The Economic Case against Human Rights and Democracy

Some authoritarian governments claim that human rights and democracy have to be sacrificed for the sake of economic development and economic progress. Here are some of the reasons given in support of this claim.

Discipline in production and consumption

Discipline in production and consumption is believed to be more important for economic growth than freedom. This discipline requires discipline in general in society, and therefore also a strong state. The exaggerated attention to rights instead of duties is incompatible with discipline. Duties are much more useful in economic development than rights. Instead of wasting scarce resources on consumption, people should moderate themselves and resources should be used for necessary investments. In addition, the free choice of labor is less important than the ability of the state to direct labor towards certain development projects. There may even be a rationale for forced labor.

"Fully engage in the movement to increase production and to practice economy to set off a new upsurge in industrial production", Chinese poster from 1965

(source)

And finally, if you want economic development, wages need to be low, union activity needs to be minimal, working hours need to be long and perhaps you have to turn a blind eye to child labor. None of this is possible in a democracy that tries to respect human rights.

You need a strong state for all of this, able to force people to be disciplined in both consumption and production.

Discipline in politics

You also need a strong state able to implement and enforce long term plans. Economic development requires consistency, coherence, long term planning and so on, all of which is incompatible with democracy and rotation in office. A democracy doesn’t look further than the next election and is unable to plan economic development. Democracy is the national equivalent of the shortsighted consumer spending everything instead of investing for the future. A democratic government will take measures which guarantee the short term interests of electors and elected, even if these measures are detrimental to the long term economic well-being of the nation.

A strong state doesn’t have to fear election results and can focus on long term planning. It has the power to enforce certain measures which are unpopular in the short run—for example because they imply limits on short term consumption, because they redirect funds towards long term investments or because they entail labor planning—but which yield great dividends in the future.

On top of that, human rights promote individualism and egoism because they are claims of the individual against society. Together with adversarial democracy they hamper national cooperation and harmony which are necessary for economic success.

Radical, not temporary, incompatibility

So according to this narrative, political freedom and human rights have to be rejected because they are by definition incompatible with economic development. And perhaps even with prosperity as such: they may not even be a luxury which poor countries cannot afford yet and which are useless when bellies are empty; they are even less than that. If you choose freedom, then not only will it be impossible to escape from underdevelopment – it will be impossible to maintain prosperity.

Rebuttal

Now, what can we say against this? Let’s take the different arguments in turn. If you assume that discipline in consumption and production is a good thing, then you basically create an export dependent economy. It’s well known that domestic consumption drives economic growth (see also here). If consumption is discouraged (and savings and investments encouraged), and if wages are low and working hours long, then you may get an initial boost in the economy, but this is no strategy for long term success. Not only does it imply dependence on exports and hence vulnerability to shocks occurring in the economies of the trading partners; it also keeps living standards low. And that can hardly be the purpose of economic development. China has clearly understood this and is trying to boost domestic demand (see also here).

The utility of child labor is obviously shortsighted – no economy can prosper without an educated citizenry – and the need for planning and long term consistency in economic policy is also a dubious argument. Centrally planned economies aren’t known for their successes. The state is not necessarily the most appropriate engine for development. Investment and planning decisions are probably best left to the market, and those investments that are best done by the government don’t require an authoritarian form of government. I don’t see how a dictatorship is better placed to plan transport infrastructure or energy provision for example. On the contrary even: the lack of transparency in a dictatorship makes it likely that such investments turn out to be corruption machines.

The argument that democracies are too fickle and shortsighted for economic planning and investments is also a bit weak. It’s difficult to deny that a democratic government, because of the way it comes to power, has more legitimacy and is therefore better placed to take difficult and unpopular decisions. People are more willing to accept or live with unpopular policies if they have a government that can be forced to justify its actions in public. Besides, the point is moot because most authoritarian leaders aren’t the long term planners and do-gooders they are supposed to be: most think only of the short term, namely their own short term financial profit.

What about the lack of cooperation, harmony and unity of democracies, and the selfishness cultivated by human rights? First of all, it’s not evident that national cooperation and harmony are best for economic development. Maybe individualism, entrepreneurship, inventiveness and doing things different are more important. And secondly, why would we assume that human rights are necessarily individualistic and selfish? There can never be an exaggerated attention to rights at the expense of duties. There are no rights without duties. And many so-called individualistic human rights create strong groups (freedom of religion, tolerance, freedom of association and assembly etc.).

Also, why would we have to think that democracy is more adversarial than autocracy? The democratic procedures for changing governments create social stability because they help to avoid revolt. Authoritarian harmony is often only skin deep – if it exists at all – because it’s based on suppression of differences. Things that are suppressed have a habit of popping up later in a more violent form.

The point is that human rights and democracy are magnificent weapons in the struggle for economic development rather than a luxury which poor people can’t afford or a false blessing which will render every economic achievement impossible or short-lived. Read more…

The Causes of Poverty (30): Lack of Economic Growth

As stated in a previous post on the same subject, when a country achieves a certain level of economic growth – or, more precisely, rising levels of GDP per capita because economic growth as such can be the result of rising population levels – it is assumed that this reflects a higher average standard of living for its citizens. Economic growth is therefore seen as an important tool in the struggle against poverty (if you wonder why poverty is a human rights issue, go here). If a country is richer in general, the population will also be richer on average. On average meaning that GDP growth isn’t necessarily equally distributed over every member of the population. That is why GDP growth isn’t sufficient proof of poverty reduction. Separate measurements of poverty and inequality are necessary.

So in theory, you can have GDP growth and increasing levels of poverty, on the condition that GDP growth is concentrated in the hands of a few. However, that’s generally not the case. GDP growth benefits to some extent many of the poor as well as the wealthy, which is shown by the strong correlation between poverty reduction and levels of GDP growth (always per capita of course). It’s no coincidence that a country such as China, which has seen strong GDP growth over the last decades, is also a country that has managed to reduce poverty levels substantially.

Unfortunately, growth isn’t a silver bullet. Poverty is a complex problem, requiring many types of solutions. Promoting economic growth will do a lot of the work, but something more is required. In a new paper, Martin Ravaillon gives the example of China, Brazil and India. The levels of poverty reduction in these three countries, although impressive, do not simply mirror the levels of economic growth. Although half of the world’s poor live in these three countries, in the last 25 years China has reduced its poverty level from 84% of the population in 1981 to just 16% in 2005 (see chart below). China is exceptional, but Brazil also did well, cutting its rate in half over the same period (8% of Brazilians still live on less than $1.25 a day). Regarding India, there are some problems with its statistics, but whichever statistic you use, there’s a clear reduction.

poverty reduction in China, India and Brazil

(source)

Ravaillon points out that the intensity of poverty reduction was higher in Brazil than in India and China, despite lower GDP growth rates.

Per unit of growth, Brazil reduced its proportional poverty rate five times more than China or India did. How did it do so well? The main explanation has to do with inequality. This (as measured by the Gini index, also marked on the chart) has fallen sharply in Brazil since 1993, while it has soared in China and risen in India. Greater inequality dampens the poverty-reducing effect of growth. (source)

Which is rather obvious: higher levels of income equality means a better distribution of the benefits of growth. So the “pro-growth strategy” against poverty is important but not enough, and should be combined with Brazilian type anti-inequality measures (focus on education, healthcare and redistribution).

Why Do We Need Human Rights? (10): Why Do We Need Democracy?

Regular readers will know that I see democracy as a human rights issue. The standard human rights texts (declarations, treaties and constitutions) all provide a right of the people of a nation to take part in the government, choose representatives in free elections etc. As with human rights in general, many people are in favor of democracy, but are unable to say why, or are unable to agree on the reasons why they are in favor. Some people may not have a particular reason to favor democracy, apart from a pragmatic one: it has worked quite well, especially compared to other forms of government that have been tried before, and it’s such a fuss to change.

Those who have reasons can be divided into two “camps”: those who view democracy as the best means to an independently valuable  goal, and those who view democracy as intrinsically valuable. The former group is the most numerous (and includes me). An instrumental justification of democracy can take many different forms, depending on the ultimate goal that is supposed to be promoted by democracy. The most common forms are:

• Democracy promotes prosperity, economic growth and poverty reduction. Read more here and here.
• Democracy promotes peace (internally and externally). See here, here and here.
• Democracy leads to better political decisions. See here, here and here.
• Democracy leads to less repression and more respect for human rights. See here, here, here, here and here.

I believe all of these statements are very persuasive, and taken together they form a very powerful justification of democracy (although we may need to agree on a very specific definition of democracy in order to be convinced by these statements – but that’s another discussion).

The non-instrumental justification, the one that says that democracy is good, not because of what it produces, but because of what it is, is also very interesting and persuasive. It focuses on what happens to people when they participate in government, what happens when democracy takes place, not what happens after it has taken place. So instead of pointing to beneficial consequences of democracy – more prosperity, more peace etc. – it points to the benefits of community, association, participation, self-government, self-determination etc. and how these things improve people’s characters, virtues and happiness. Read more here.

The only problem I have with this non-instrumental approach in which democracy is an end in itself, is that it tends to collapse into the instrumental approach: if democracy improves people’s character, then it’s also instrumental. It’s only an end in itself in the sense that it’s product doesn’t appear afterwards (like peace follows from democratic rule), but is simultaneous with it (people’s characters and virtues improve because of democracy, but only as long as democracy “happens”).

Banksy, monkey parliament

(source, there’s more Banksy here)

However, often it’s quite irrelevant which type of justification of democracy we prefer, and how successful (or not) the chosen justification is. Such exercises can be no more than “preaching to the choir”, intellectually interesting but practically irrelevant. People who already accept democracy don’t need a philosophical explanation of why democracy is so wonderful. And people who don’t accept democracy are often immune to rational justifications or to philosophy in general. Good luck approaching the Taliban with a philosophy paper on the benefits of democracy… (In fact, good luck approaching them at all).

More here. See some statistics on public support for democracy here.

Income Inequality (17): Rising Poverty and Falling Income in the U.S.

poverty in the U.S.

(source, source)

Disappointing data from the U.S. Census Bureau: in 2008, poverty rose and median income declined (source), undoubtedly as a consequence of the recession.

Median household income declined 3.6 percent in 2008 after adjusting for inflation, the largest single-year decline on record, and reached its lowest point since 1997. The poverty rate rose to 13.2 percent, its highest level since 1997. The number of people in poverty hit 39.8 million, the highest level since 1960. (source)

poverty and income levels in the U.S.

(source, adjusted for inflation)

Since the recession only started mid-2008 and became much worse in 2009, the data for 2009 - and perhaps 2010 - will probably be even worse. Unemployment is one of the main causes for falling income and rising poverty, and unemployment is a “lagging indicator“, meaning that employment only starts to pick up long after a recession has officially ended.

Poverty levels have been on the rise since a number of years.

The rise in poverty in 2008 followed a disappointing performance during the economic expansion that started in late 2001 and ended in December 2007. Poverty, which rose during and after the 2001 recession, never dropped back down to its pre-recession level. This was one of the worst records for poverty reduction of any economic recovery in decades. … The disappointing performance of the last economic expansion reflects, in part, the fact that the fruits of the economic growth during that expansion were heavily skewed to people high on the income scale rather than being broadly shared. Economists Thomas Piketty and Emmanuel Saez have found the top 1 percent of households received two-thirds of the growth in national income that occurred during the recovery, a larger share than in any other economic expansion since the 1920s. (source)

Read more on income inequality in the U.S. here, here, and here. Child poverty increased as well:

The child poverty rate rose to 19.0 percent, leaving nearly 14.1 million children under 18 (nearly one in five) below the poverty line. The percentage of all children who live in families below half the poverty line also rose, to 8.1 percent. Both the percentage of children in poverty and the percentage in deep poverty* reached the highest point since 1997. (source)

child poverty rate in the U.S.

(source)

Compare this to other developed countries:

child poverty rates in different countries

(source)

I made some critical remarks on the “poverty line” as the poverty measurement system in the U.S. here. If those remarks are correct, the picture would be even bleaker.

One could claim that declines in household income result from declines in household size. While it’s true that households are somewhat smaller now than 10 years ago, this doesn’t explain the drop in income. See here.

* “Deep poverty” = cash incomes below half of the poverty line

Why Do Countries Become/Remain Democracies? Or Don’t? (6)

Vaclav Havel addressing the crowds during the Velvet Revolution in former Czechoslovakia

(source)

Democracy is a human right. If we want to promote universal respect for this right, we have to know how societies have achieved the transition from authoritarian forms of government to more democratic ones, and how democracies have avoided the opposite transition. Once we know this, we can promote the future emergence of democracies, and we can counteract the breakdown of existing ones.

Unfortunately, this is a very murky area of political science. The only thing that’s clear is that there is no silver bullet. There isn’t one thing we can do to transform societies once and for all into democracies. Things aren’t easy or simple. A huge number of factors have been identified as causes of or obstacles to democratic transitions, and existing democracies need constant nurturing and protection. A few of the factors that have been named as either promoting or inhibiting democracy are:

• economic growth or GDP per capita
• protestant culture versus catholic culture (a catholic culture is believed to be more hierarchical)
• levels of education and literacy
• income or wealth inequality (in very unequal societies, the wealthy have a lot to lose with democracy)
• levels of employment in agriculture versus industry (industrial societies are believed to more more urban and less attached to traditional and authoritarian social relationships)
• the presence/absence of neighboring democracies
• export diversity (countries with one major export product such as oil tend to be “resource cursed“)
• is a country a former U.K. colony or not? (former U.K. colonies are believed to be more sympathetic to democracy given their British colonial heritage)
• is there a large middle class or not?
• etc.

Statistical analysis to pinpoint which ones of these many variables really determine democracy – and which ones are merely guesses – has yielded contradictory results, not surprisingly given the low numbers of observations (societies or countries don’t change their political systems very often) and the relative lack of long time series (most classifications of regime types haven’t started earlier than a couple of decades ago). One interesting analysis is here.

So don’t expect me to have an opinion here. What I wanted to focus on in this post is the first in the list. There are two radically opposing views on the effect of economic development on democracy. One view, which I’ve defended here, is called modernization theory. Basically, the idea is that as countries develop economically, people will switch to other, higher needs, such as self-government, self-control, and political activity in general (see Maslow’s Scale, for instance). Poverty, on the contrary, forces people to focus on survival and makes democracy seem like a luxury.

However, the opposite view is also persuasive. Countries that do well economically are less likely to become democratic because the population is quite pleased with how things are going and will not revolt. The authoritarian rulers can claim that it’s thanks to them that things are going well. It’s not unlikely that economic collapse rather than success causes authoritarian regimes to break down.

So even if you isolate one of dozens of possible factors causing regime transition, things aren’t very clear. Should we starve dictatorships, or help them develop economically? As a result of this lack of clarity, it’s very difficult to frame foreign policy in such a way that it favors the development of democracies around the world. This may go some way to explain the traditional lack of ambition in diplomatic circles.

Human Rights Facts (27): Democratization and Economic Growth, Why Democracy is Good for the Economy

This paper, by Elias Papaioannou and Gregorios Siourounis, examines the effect of democratic transitions on economic growth. Since democracy and the absence of poverty are both human rights issues, and since poverty usually correlates with insufficient economic growth, it is encouraging to see that countries which have experienced a transition to democracy experience higher average growth after the transition.

The graph below, from the paper, plots the evolution of real per capita GDP growth in the years surrounding a successful democratization (the year of the democratization being T), compared to the global growth rates in each year. The average growth is the purple dashed line. The graph also shows that the transition itself may imply economic costs, but in the longer term democracy pays off.

Now, democracy is of course desirable for many reasons, and most of these are unrelated to the economy. But the fact that democracy produces economic gains will make it even more attractive.

Why does this happen? Why is democracy good for economic growth? For many reasons, some of which are the rule of law and respect for human rights (property rights, freedom of information etc.). More here.

Income Inequality (10): Two Worlds, The Obscene Disparities Between the Rich and the Poor

John Maynard Keynes

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From the earliest times from which we have record, that, say, the two thousand years before Christ, down to the beginning of the eighteenth century, there was no really great change in the standard of living of the average man living in the civilized centers of the earth. Ups and downs, certainly visitations of plague, famine and war, golden intervals, but no progressive violent change. Some periods perhaps fifty percent better than others, at the utmost a hundred percent better in the four thousand years that ended, say, in A.D. 1700. John Maynard Keynes

Our world today presents a shocking image: whereas the world economy produces enough to feed and house every single human being in a healthy way, humanity has divided itself into two groups: one, including about half of humanity, is hardly able to sustain life in a decent way; and another that spends too much, eats too much, works too much, wastes too much, and wrecks havoc on the earth.

It’s important to remember that this obscene inequality between the rich and the poor parts of humanity is a relatively recent phenomenon. Poverty may seem to be a big problem now, and it surely is, but 300 years ago it was the world’s problem, whereas now it is “only” a problem for half of the world.

Throughout much of human history, poverty was the norm. With the exception of a very, very small minority of rulers, landlords and tradesmen, everyone was as poor as the average poor person in Africa today. Life expectancy and income levels were not much different in Europe in the 16th century and in Africa in the 21st.

Hence, poverty wasn’t seen as a problem. It was the normal and perhaps even inevitable condition of life.

The current division of the world in rich and poor is the result of very uneven economic growth over the last 200 or 300 years, compared to very limited growth during the millennia before. You can see the relatively recent rise in economic growth in this graph:

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The uneven economic growth over the last 2 or 3 centuries - with startling levels of growth in the West and much more modest levels in the rest of the world - resulted mainly from uneven levels and speed of industrialization and technological development. For different reasons, modern industrial production based on technological improvements and inventions, first took off in the West, and more specifically in the U.K. This has had a hugely beneficial effect on living standards in the West.

Of course, industry and technology were not the only factors behind economic growth in the West. Exploitation of the rest of the world, colonialism and imperialism also helped the West develop, and to some extent restricted development in the “target” countries (“to some extent” because underdevelopment has many causes, including politics, climate factors, trade policies etc.). But colonial exploitation was made possible by technology and industry. And so it came second. Economic growth in the West, driven by technology, gave western counties the means, including vastly superior military means, to colonize the world. And once colonization was on its way, it was driven by other factors as well. The West’s technological and military superiority, caused by industrialization, would incite many westerners to believe that they were also in other ways superior: intellectual, moral, religious, psychological etc. Hence, racism further exacerbated colonial exploitation.

These are, in a nutshell, the causes of the current division of the world. This division is in itself a vast improvement, compared to the fate of humanity centuries ago. But the current contrast between rich and poor makes poverty seem more scandalous than it did before. And it really is more scandalous, given the economic possibilities to end poverty altogether. This scandal has given rise to Article 25 of the Universal Declaration of Human Rights:

Everyone has the right to a standard of living adequate for the health and well-being of himself and of his family, including food, clothing, housing and medical care and necessary social services.

Such a right would have been inconceivable some centuries ago, because there simply wasn’t an economic base to do something about it. It was as inconceivable then as a right to universal friendship and brotherhood is today.

Human Rights Facts (16): The Yellow Peril

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The Yellow Peril (or Yellow Danger) refers to the skin color of the Chinese, and the belief that the Chinese nation is a threat to the West. The concept of Yellow Peril, as it first surfaced by the end of the 19th century (and also during the Second World War when it included Japan), was initially racist and anti-immigration. Today it is no longer explicitly racist. The threat is not racial, nor is it linked to population theories or immigration fears. The Yellow Peril is now an economic one. China is a huge industrial complex, producing cheap goods that force western goods out of the shops, and force western workers, with their relatively high wages, out of their jobs.

Many believe that China, the new superpower, will not only undo the economic supremacy of the West and erode its wealth, but also threaten its political culture. If a non-democratic country that doesn’t seem to believe in human rights, becomes the world’s superpower, then democracy and rights will be jeopardized.

However, the economy is not a zero-sum game. It’s not because a country progresses that others must lose proportionally. The growth of the Chinese economy also creates a giant community of consumers able to buy more western goods. In addition, when China grows, it may become more liberal. There is some evidence that countries democratize at roughly the same speed as they develop economically.

Furthermore, Chinese growth is not destined to last. China faces many problems that may one day slow down its development or even bring it to a halt. Although China has been able to lift hundreds of millions of its citizens out of poverty, rural and urban inequality has grown at alarming rates, stirring unrest amongst the many who remain poor.

With massive layoffs in the rust-belt provinces, arbitrary local levies on farmers, pervasive official corruption, and toxic industrial dumping, many in the countryside are highly agitated. Chinese police records indicate a sevenfold increase in the number of incidents of social unrest in the last decade. Pranab Bardhan (source)

Ethnic problems in the west of China may develop into violence.

For many centuries, the homogenizing tradition of Chinese high culture, language, and bureaucracy has not given much scope to pluralism and diversity, and a centralizing, authoritarian Communist Party has carried on with this tradition. There is a certain pre-occupation with order and stability in China (not just in the Party), a tendency to over-react to difficult situations, and a quickness to brand dissenting movements and local autonomy efforts as seditious, and it is in this context that one sees dark clouds on the horizon for China’s polity and therefore the economy. Pranab Bardhan (source)

There are also some economic worries about China’s growth.

China’s share in the worldwide manufacturing value-added is below 9 percent, less than half that of Japan or the United States. Domestic private enterprise in China, while active and growing, is relatively weak, and Chinese banks are burdened with “bad” loans. Pranab Bardhan (source)

Projections of China’s GDP show that it’s not likely to take over the West as the economic superpower in the decades to come:

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China’s authoritarian form of government is likely to impede its future economic growth:

China’s authoritarian system of government will likely be a major economic liability in the long run. Pranab Bardhan (source)

Another element of the Yellow Peril theory are the worries about China’s military development (see this post). However, here as well the data tell a different story:

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The Environment and Human Rights (1): The Environmental Kuznets Curve

Simon Smith Kuznets

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It’s not uncommon to hear people worry about the economic development of the developing world: what if these billions of people start to drive cars, use airco, eat meat etc. to the same extent as the people in the West? Would that not spell the end of the earth? Isn’t there a contradiction between the fight against poverty and care for the environment? Are we forced to make some tragic choices? Leave people in poverty and save the earth, or save people and destroy the earth? Or radically change the Western life style?

The concept of sustainable development, development and economic growth which takes the environment into account, doesn’t seem to calm the fears. And then people start to discuss overpopulation and all the nastiness that comes with it, or they turn to cultural pessimism about the excesses of the Western consumer society.

A more hopeful sign comes from economics, and in particular the Environmental Kuznets Curve. This curve shows a U-shaped relationship between per capita income (GDP) and the quality of the environment. Measures of the quality of the environment do indeed fall in the initial stages of economic growth, but this trend turns around at about $5.000 per capita GDP, with many measures of environmental damage showing improvement from $8.000 onwards (source).

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Human Rights Facts (15): Putinism, or Putin’s Model of Successful Authoritarianism

Putin

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In a way similar to the leadership in China, Putin claims that authoritarianism and a state that rolls back democracy and freedom, are necessary for economic prosperity, growth, order and stability, and that the current economic upturn in Russia happened thanks to his autocratic reforms. (The situation in China is of course different in many respects, e.g. the role of Confucianism).

It is indeed a fact that the decrease of political and other types of freedom in Russia during the rule of Putin in the first decade of the 21st century, has coincided with strong economic growth:

(source: McFaul/Stoner-Weiss in Foreign Affairs)

Like China, Russia is an exception because there is a correlation between economic growth (especially long term and stable growth) and democracy (see also some evidence here).

The question, however, is whether the turn towards authoritarianism has in fact contributed to the increase in growth, and whether it was necessary for this growth to take place. The answer is no. Growth would most likely have been higher without Putin’s rollback of freedom in Russia. Before I substantiate this claim, I’ll first give a few facts about Putin’s attacks on freedom.

A list of Putin’s attacks on freedom in Russia

• Independent media outlets, including TV, radio and printed media have been muzzled by Putin in various ways: nationalization, indirect Kremlin control, control by Kremlin-friendly oligarchs etc. As a result, media coverage of Russian politics is now overwhelmingly one-sided and in favor of Putin and his allies. Opposition figures and parties are either ignored or heavily criticized in almost all Russian media.
• Russia is now the 3rd most dangerous place in then world to be a journalist (only Iraq and Colombia are worse).
• The autonomy of regional governments has been reduced. Governors are no longer elected but appointed by the Kremlin.
• Both Houses of the Russian Parliament have been emasculated. The Upper House has seen elected representatives being replaced by appointed ones, and the Duma is dominated by Putin’s party (United Russia) or straw men put in place by the Kremlin to create the illusion of opposition. The one-sided media coverage has contributed to this emasculation, but independent and real opposition parties have often been hampered in several other ways as well (restrictions on public assembly rights, spurious law suits etc.), or have simply been disqualified from participating in elections, often on shaky grounds.
• Local and foreign NGOs are either forbidden or heavily restricted.

A few facts about economic growth in Russia

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The immediate post-Soviet period in Russia saw the emergence and development (albeit slow and difficult development) of democracy coinciding with economic decline. However, this decline wasn’t caused by the development of democracy or the disappearance of communism. It started long before the 1990s and was a major cause of the collapse of communism and the Soviet Union.

By the end of the 1990s, before Putin’s take-over and long before his authoritarianism took full sway, the situation was already turning around (growth started in 1999) and many positive measures were taken – and not reversed by Putin later on. These measures benefited Putin enormously. But what benefited Putin most was the increase in oil and energy prices. It is not clear what proportion of GDP growth in Russia is caused by energy prices, but all economists agree that it is a substantial proportion.

Putin’s claim that Russia is economically prosperous because of his authoritarian rule can also be countered by comparing Russia’s economic performance with that of other postcommunist states, states which do not have the huge energy resources Russia has:

(source: McFaul/Stoner-Weiss in Foreign Affairs)

We see from this graph that Russia is in fact doing worse, notwithstanding it’s resource advantage. Other postcommunist countries, most of which have gone much further along the road to democracy, have done better with much less. So one can assume that Russia would have done better as well had it not rolled back democracy.

A few facts about the performance of the Russian government

Putin not only claims that his style of government has promoted economic prosperity. He also claims credit for stability and order in Russia today, and for the state regaining its strength after the breakdown of the 1990s. This, unfortunately, is also untrue. Some facts:

• The worst terrorist attacks in Russia took place under Putin’s rule.
• The murder rate in Russia has increased in the first decade of the 21st century.
• The population of Russia has decreased, mainly because of increasing mortality rates, a weak health system, increasing alcohol abuse and an HIV epidemic that is the worst outside Africa. Life expectancy in the “bad years” in the 1990s actually rose, whereas now it’s falling.
• Russia’s ranking in different international scoring systems has dropped (corruption and transparency, freedom, competitiveness etc.).

In some respects, there has been progress (it would have been very surprising to see a lack of progress in all domains of life): infrastructure has improved, spending on education has increased, unemployment and poverty rates have fallen, foreign debt and budget deficits have been eradicated … But overall, one cannot claim that Putin’s Russia provides better public goods and services to its citizens that Yeltsin’s.

(This post does not enter into the discussion about Russia’s recent foreign policy adventures, which are undoubtedly caused, at least in part, by Putin’s authoritarianism).

More on freedom and growth.

The Causes of Poverty (10): Lack of Economic Growth

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Economic growth is the increase in value of the goods and services produced by an economy or a country. It is the percent rate of increase from one year to the next in gross domestic product or GDP of an economy or a country. In order to correct for the population sizes of different economies and countries, GPD per capita rather than national or total GPD is used.

GDP per capita of an economy is often used as an indicator of the average standard of living of individuals in that country, and economic growth is therefore often seen as indicating an increase in the average standard of living. “Average” means that GDP growth is not the same as poverty reduction. GDP growth per capita does not provide information on the distribution of income in a country/economy. A rise in the average standard of living can be accompanied with greater inequality and poverty for some or even many.

Therefore separate measurements of distribution or inequality and poverty are necessary.

However, there is a strong correlation between these measurements. As an empirical matter, economic growth (annual growth in GDP per capita) and poverty reduction go hand in hand.

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Since growth and poverty reduction go hand in hand, it is of the utmost importance that those who care about poverty reduction do everything possible to promote economic growth. Even though our knowledge about the kinds of policies that stimulate growth is limited, we know that some things in some circumstances drive economic growth and others do not. Good institutions, good education, investments, respect for human rights and the rule of law, free markets etc. are generally considered to be good for growth.

This doesn’t mean that economic growth is all that matters, that poverty reduction follows automatically from growth or that only policies that are targeted on growth can generate poverty reduction. This kind of “invisible hand” theory, or “trickle down” theory has been discredited. Other policies such as redistribution are also necessary for poverty reduction, but it is precisely economic growth that delivers the means for redistribution. Conversely, policies specifically aimed at poverty reduction can benefit growth. It’s interesting to note that poverty reduction is one of the drivers of growth. So the causation goes both ways, as is often the case in correlations.

Policies that are effective in increasing the incomes of the poor–such as investments in primary education, rural infrastructure, health, and nutrition–are also policies that enhance the productive capacity of the economy in aggregate. (source)

John Rawls

So specific policy measures aimed at improving the lives of the poor are necessary. An exclusive focus on fostering growth is wrong. One could even say that the focus on the poor is the priority, and that measures aimed at growth are only a means to help the poor, and only one means among many. This has become known as the difference principle of John Rawls: social and economic inequalities are to be arranged so that they are to be of the greatest benefit to the least-advantaged members of society.

“From this perspective, it can be entirely rational and proper for a government to select, among two competing growth strategies, the one that has greater potential payoff for the poor even if the aggregate growth impact is less assured. (source)

There is a correlation between poverty reduction and economic growth, not because economic growth automatically and single-handedly reduces poverty, but because policy makers can use growth to reduce poverty and because these efforts in turn promote growth. Growth is good for the poor, but growth without poverty measures will be unequal growth, growth which doesn’t benefit everyone equally. Growth can indeed lead to lesser gains, no gains at all or even absolute losses for some people at the bottom of the income distribution scale, for example those people who were previously working in factories that were closed because of the industrial reforms necessary for overall growth (such as liberalization).

None of the above is meant as a denial of the possible negative aspects of economic growth: the costs to the environment aren’t factored in, disasters create economic growth because of the reconstruction etc.

More on poverty.