A compelling case

The End of Poverty by Jeffrey Sachs Penguin, 2005, 288 pp, $24.95 Reviewed by John Quiggin WHAT policies lead poor countries onto a path of self-sustaining growth, and how can other countries assist in this process? More than 200 years after Adam Smith wrote The Wealth of Nations and 50 years after development economics became a recognised area of specialisation, these questions have not been answered. There has been some progress. One analysis of the problem, arguably the most popular at the outset, has been fairly conclusively refuted. That analysis drew on the seemingly successful experience of the Soviet Union and on concerns about the terms of trade for primary products to conclude that the optimal policy was a combination of autarky (no trade with other countries, or at least no trade with capitalist countries) and central planning. The autarkist analysis has been turned on its head: the standard path to development, modelled on that of Japan, is now seen as beginning with labour-intensive export industries, such as light manufactured goods and tourism, followed by a climb up the skill ladder to more complex goods and services, based on imported technology, and then to domestic technological innovation. A corollary of this has been general agreement on the importance of education, which was rechristened as investment in human capital in the early 1960s. By contrast, concerns about accumulation of physical capital have been downplayed. In part this is because the early stages of rapid growth are commonly characterised by high savings rates (contrary to what economic theory would predict) and in part because the standard path involves importing capital equipment in its early stages, by contrast with the Soviet path in which the capital goods industry was the main initial focus. A final point, obvious enough in retrospect, but not initially recognised, is the benefit arising from the rule of law, and, conversely, the damaging effects of civil conflict. This point can be overstated, particularly in the work of writers like Hernando de Soto who focus almost exclusively on property rights and the ownership of capital. Nevertheless, in the absence of reasonable levels of security for people and property, there is less benefit in undertaking economically productive activity than in seeking to appropriate wealth through the seizure of political power. Under such conditions, sustained growth is difficult to achieve. All of this is significant progress, but it leaves fundamental questions unanswered. From an initial position of a poor economy, primarily reliant on subsistence agriculture, how does the process of growth get started? Should export-oriented industries be assisted, or is it better to adhere to a purist free-trade policy? Should capital markets be more or less regulated than in developed countries? What role should governments play in health and education? Can wealthy countries help the process and if so, how? There are no generally agreed answers to these questions. In particular, there is no generally accepted recipe according to which modest amounts of aid from rich countries can reliably generate self-sustaining economic growth. As a result, discussions of aid are commonly tinged with an air of hopelessness, typified by the title of William Easterley’s influential 2001 book, The Elusive Quest for Growth. It seems more useful to focus on a second question, less intellectually ambitious, but more directly pressing. What can be done to alleviate, and if possible end, the suffering associated with extreme poverty, from famine and epidemic disease to chronic hunger and malnutrition? In The End of Poverty, Jeffrey Sachs argues that extreme poverty can be ended in this generation, and that a feasible strategy to achieve this goal already exists, and needs only funding and political will. The book is an odd mixture. The first half is an autobiographical sketch, and an apologia for Sachs’s adventures in development policy, from Bolivia to Russia. The success or failure of this part of the book is largely independent from the second half, which advances arguments in favour of a large-scale program aimed at ending extreme poverty. Before considering the arguments in detail, it is worth attempting to look at the problem in quantitative terms. The standard statistical measure of extreme poverty is an income per person of less than $US1 per day, as estimated using the purchasing power parity method of the World Bank to compare incomes in different currencies and nations. An income of between $US1 and $US2 per day is defined as moderate poverty. People in extreme poverty are chronically hungry and lack access to basic health services and to elementary education. In these conditions, self-sustaining growth is almost impossible. Of the world’s six billion-plus population, about 1.1 billion people are estimated to live in extreme poverty, and about 1.6 billion in moderate poverty. While these numbers are huge, it is a striking fact that, for the first time in human history, the majority of people in the world are not, by these standards, poor, and only about one in six is extremely poor. This has profound implications for the feasibility of the task of ending extreme poverty. Consider the total amount of additional income that must be generated by poor people, or transferred to them by others, to lift them out of extreme poverty. To get an upper bound estimate, let’s ignore their existing income altogether. One dollar per day for 1.1 billion people is about $US400 billion per year, a bit less than the US defence budget, and about 1 per cent of the income of the world as a whole. Even this modest number overstates the difficulty of the task facing the wealthy countries of the world. Although poverty in East and South Asia has declined rapidly, a majority of the world’s extreme poor are still found there, with hundreds of millions in both India and China. These countries are now wealthy enough, and growing rapidly enough, to address the problem of extreme poverty primarily with their own resources (India will need modest assistance), though so far these growing incomes have been very unequally distributed. The defeat of the BJP government in the Indian elections of 2004 reflected the demands of India’s rural poor for a fairer share of the benefits of economic progress. China’s leaders will eventually have to respond to similar pressures. The main obligation of the wealthy countries here is to resist pressure for protection against the exports of goods and services that are driving growth in East and South Asia The more intractable core of the problem of poverty is in sub-Saharan Africa and affects between 300 million and 500 million people. To raise the incomes of all these people out of extreme poverty requires additional income totalling no more than $US200 billion per year. Sachs quotes the estimates of the global Millennium project to suggest that the amount required from wealthy country donors is closer to $US100 billion per year, and could be achieved by gradually increasing aid between now and 2015, until the total contribution was about 0.7 per cent of GDP, an amount long-promised, but never delivered, by the rich countries. To mobilise public opinion in favour of such a policy, it is necessary to overcome the well-known counter-arguments. These are, first, that large-scale aid programs have failed in the past and, second, that aid is necessarily ineffectual because corrupt and dictatorial governments, particularly in Africa, will capture all the benefits. As anyone who has followed the debate knows, the first argument is based on a false premise, namely that large amounts of aid have been spent with the aim of alleviating extreme poverty. Americans in particular are prone to the belief (which was in fact true during the Marshall Plan years immediately after the second world war) that their government spends large amounts of money on foreign aid. Sachs quotes a 2001 survey indicating that Americans, on average, believe that 20 per cent of the US government budget is spent on foreign aid (the actual figure is less than 1 per cent). The total amount of aid going to Africa from all sources is about $US12 per person per year, and much of this is tied in ways that reduce its effectiveness. It’s scarcely surprising that there’s not much evidence of past aid efforts: how much evidence could we expect? On the second point, Sachs offers a number of counter-arguments. Corruption and ineffective government are almost inevitable in a poor country, but Sachs points to empirical evidence suggesting that, taking account of poverty levels, African countries are no more corrupt than others. In this context, it’s important to distinguish between the routine corruption and inefficiency that affects all governments to a greater or lesser extent and the extreme cases (for example, Sudan and Zimbabwe) where governments are, in effect, waging war against their own citizens. In the worst cases of civil war or brutal dictatorship, it may be impossible to implement aid programs at all, or it may be necessary to provide aid in ways that bypass governments altogether. But such extreme cases are the exception rather than the rule. More generally, although governments may suffer from corruption and inefficiency, this does not constitute a reason for doing nothing. Even significant losses to corruption, and other problems like high transport costs, are not sufficient to offset the startling differences in the costs of effective medical interventions in poor and rich countries. A standard estimate for the cost of a marginal health intervention that would yield one extra year of life for one person in a rich country is $US50,000. The same amount spent in a poor country would yield health benefits hundreds of times greater. The total expenditure required of the rich countries to finance the Millennium project is minimal in relation to other public priorities. An obvious comparison is the Iraq war, which has already cost $US300 billion. Even more striking is Sachs’s observation that the US could finance its own contribution simply by repealing the tax cuts recently granted to taxpayers with incomes in excess of $US500,000 per year. Ours is the first generation in which most people in the world are not poor. We can be, if we choose, the first in which no one lives in extreme poverty. Sachs makes a compelling case for action. It remains to be seen whether governments, and the voters who elect them, will listen. • Professor John Quiggin is a federation fellow in economics and political science based at the University of Queensland and the Australian National University. His web site is at http://www.uq.edu.au/economics/johnquiggin and his weblog is at http://johnquiggin.com. This article first appeared in the Australian Financial Review