Back in 2017, the Center for Freedom and Prosperity released this video, which shows that free markets and small government are the best recipe for poor nations that want to become rich nations.
The CF&P video was motivated in part by a need to debunk international bureaucracies such as the OECD and IMF, which abandoned the “Washington Consensus” for economic liberalization and instead have been making the odd argument that prosperity can be achieved with higher taxes and a bigger burden of government spending.
Needless to say, neither of these international organizations has bothered to explain how such dirigiste policies produce more growth.
But the politicians who fund and control such bureaucracies doubtlessly appreciate the message.
You probably won’t be surprised that the United Nations also is on the wrong side of this issue.
A recent report from the New York City-based group regurgitates the anti-market viewpoint.
The argument that pro-market policies automatically benefit the poor is likewise at odds with the evidence. Traditional pro-growth polices, such as lower corporate tax rates, labor ‘reforms,’ deregulation, austerity-driven cuts to services, and privatization
can have devastating effects on the well-being of poor people and the state’s capacity to reduce poverty. …There are various ways to reduce extreme inequality, but redistribution is an essential element. …Significant redistribution is indispensable. …Fair and equitable taxation can lay the foundations for a society that respects and promotes well-being for all. …Low tax revenue has hobbled the capacity of governments to undertake redistributive policies. …The time has come to take social protection seriously.
For those who don’t follow these issues closely, “social protection” is the buzz phrase to describe an ever-bigger welfare state.
As you might imagine, the report doesn’t provide any evidence to justify the assertion that higher taxes and bigger government will lead to less poverty and deprivation.
Which is an excuse to recycle my “never-answered question” since I’m still waiting for someone to show me a nation that became rich with the types of statist policy that the U.N. has embraced.
The most remarkable part of the report is buried toward the end. The United Nations actually argues that the poor will be better off if there is less economic growth.
A ‘pro-poor’ growth scenario necessitates a far smaller increase in global GDP and eradicates poverty much sooner. If every country reduced its Gini index by 1 percent per year, it would have a larger impact on global poverty than increasing each country’s annual growth one percentage point above current forecasts.
This is bad math, bad logic, and terrible economics.
And it assumes politicians can deftly re-slice a shrinking pie so that poor somehow get more than they have now (while ignoring Thomas Sowell’s sage warning that wealth can only be redistributed one time).
I’d like the United Nations (or any person or group) to show me a single example – at any point in world history – where less growth has improved conditions for poor people.
For what it’s worth, I can show lots of evidence that growth is the best recipe for helping the less fortunate, even though folks on the left may not be happy since rich people also benefit from economic growth.
I can’t resist pointing out one additional passage from the report. And this one was on the first page.
Poverty is a political choice.
In reality, poverty is the normal state of human existence (an observation that Tim Worstall also made in his CapX column criticizing the U.N. report).
What’s unusual – as explained in videos by Don Boudreaux and Deirdre McCloskey – is that parts of the world became rich beginning a couple of hundred years ago thanks to a new approach called capitalism.
(Though I suppose those five words from the U.N. report can be viewed as accurate. After all, governments perpetuate poverty by failing to copy the good policies of places such as Hong Kong and Singapore. But that’s not what the report means. Instead, we’re supposed to believe that politicians are allowing poverty by not choosing big government.)
P.S. If there was a contest for worst analysis from an international bureaucracy, I still think the IMF deserves to win since it has explicitly embraced the crazy notion that it’s okay to hurt the poor so long as the rich are hurt even more.
P.P.S. Indeed, the report I’m writing about today isn’t even the U.N.’s worst publication. That “honor” belongs to the 2018 report that blatantly lied about the prevalence of poverty in the United States.
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That is obvious and it is what countries like Argentina have done. The result is that its economy does not grow and the level of poverty remains the same.
The issue is how the Gini index is reduced by 1 percentage point. Redistributing income through taxes to companies and the wealthy? This leads to lower GDP growth and less poverty reduction. This correlation is verified and documented in the World Bank data. Ultimately, what matters is reducing the level of poverty, not the level of inequality.
Alston is a lawyer and it is not his specialty to understand how the economy works, which would disqualify him from expressing such opinions at that level, but, as an article in MORE Freedom says: “If it is simply that the important man of the UN is grossly wrong, it doesn’t matter. But the fact that someone with such basic misconceptions wants to impose their prejudices and misunderstandings on the world, promoting the kind of policies that will leave millions in poverty, is unforgivable. ”
In his report he says that “using historical growth rates it would take 100 years to eradicate poverty under the Bank line and 200 years under a line of $ 5 a day. This would require world GDP to increase an exorbitant number in relation to its level current.”
The world level of poverty to a marker of $ 3.20 / day in 34 years, from 1981 to 2015 went from 56.1% to 26.4%, that is, it fell by more than half. For a marker of $ 1.90 / day, poverty went from 42.3% to 10%, to a quarter.
A simple rule of three allows us to calculate poverty at $ 1.90 / day. If it fell 32.3% in 34 years to reach 10% in 2015, how many years does it take for it to reach zero, maintaining the growth rate? The result is 11 years. Very far from the 100 it says. Where do you get that figure from? It seems to ignore basic arithmetic.
A similar result would be obtained with the parameter of $ 3.20. 34 years would be required. Also very far from the 100 years he says.
For a marker of $ 5 / day we will not reach the exaggerated figure of 200 years either.
Meanwhile, GDP at constant prices grew in that same period (34 years) by 1.64 times, at an annual average rate of 4.8%.
Therefore, it is also false that the GDP would have to increase an exorbitant number in relation to its current level to reduce poverty to zero.
But the historical trend is that, in fact, the increase in GDP accelerates as time passes, due to technological advances, so it would not be surprising that its growth manages to eliminate poverty even in less time than using the average 34 years old.
The other argument that inequality must be reduced in order to reduce poverty, falls under its own weight when analyzing the reality data.
China accounts for the largest reduction in poverty in the world. But at the same time, it accounts for the largest increase in inequality.
Economic growth is accompanied by increased inequality. Economic growth is essential to reduce poverty. Abundant economic literature confirms this.
Inequality is associated with economic growth for a simple reason: the increase in company sizes, which are essential to serve global markets.
To reduce inequality, it would be necessary to limit the size of the companies, which is totally counterproductive.
That reducing poverty requires reducing inequality is a myth that has no scientific basis.
No economy can grow and develop unless companies also grow, the basic unit of any economy. In the global economic dynamics, the largest companies are those that achieve the economies of scale necessary to compete in the markets and offer goods and services to more consumers with higher quality and lower prices. Not all of them succeed nor do they all necessarily compete in global markets. Small and medium-sized companies serve local markets with also necessary goods and services, and many are also part of international supply chains.
The unequal size of the companies is not a problem, each one has a role in the economic gear and together they create wealth and drive economic development. Why then should inequality of income or wealth be a problem?
The wealth is not stored in a Rico McPato vault, it is in the form of company assets. It cannot be redistributed.
For more about this issue: https://www.caftabusiness.com/forumeconomicus/blog/2019/11/11/desigualdad-y-desarrollo-economico/
That is actually true. Re reducing poverty.
I gather they are talking the arbitrary poverty line. 70% of median income or something like that? So if you can reduce the median income than the poverty line will reduce with it. Assuming those previously below the poverty line maintain the same income then eventually the median income and the poverty line with it will eventually reduce enough that these people will no longer be in poverty.
Of course there lives wouldn’t have improved at all, likely gotten worse. And the assumption that their income wouldn’t drop as well is pretty unlikely. Although perhaps they’d bunch up a bit more. Maybe the lower income wouldn’t drop as much as the higher income.
Alternatively you could genuinely increase median income to 1 million Dollarydoos and anyone earning less than 700 thousand is technically in poverty.
You can’t eliminate poverty if you use an arbritary figure that is a percentage of the median. Most people think of poverty as people being unable to house, clothe, feed themselves. I’m not sure those people, mental health problems aside, exist in the free world right now. But my understanding is that usually the reference of poverty is something like as I’ve stated above..
Figures aren’t right, haven’t read the report but I think I got the gist of it. How’d I do?
Mr. Mitchell:
Consider the following excerpt from the UN poverty article: If every country reduced its Gini index by 1 percent per year, it would have a larger impact on global poverty than increasing each country’s annual growth one percentage point above current forecasts.
That statement is absolutely true. It will have a larger impact on poverty–increasing it exponentially!!
Thank you,
Kevin
Susquehanna County, PA
Sent from my Behemoth Dell 690