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Living on the edge
Wednesday, 26 November 2008 07:41

Why have the recent rises in food and energy prices been labelled crises?  Why is the global financial crisis transforming itself into to a social and development crisis?  Hasn't globalization lifted millions of people out of dire poverty?  Yes, indeed, but all progress is relative.  And while many people have been lifted out of absolute poverty, a large share still live in near poverty and in precarious situations.  They are living on the edge.

Jeffrey Sach's book "The End of Poverty: how we can make it happen in our lifetime" makes perhaps one of the best presentation of the history of poverty.  As he reminds us, until the mid-1700s, the whole world had always been remarkably poor -- in terms of GDP per capita, life expectancy, child mortality, killer diseases, famine and so on.

The world of today, where some are poor and some are rich is a product of developments in the last couple of centuries.  Drawing on the data of economic historian, Angus Maddison, three main points stand out.  In 1820, all of the world's regions were poor.  All the world's regions then experienced economic progress.  But today's rich countries, experienced by far the greatest economic progress. 

This great transformation was led by the Industrial Revolution in Britain, supported by a rise in agricultural productivity in northwestern Europe.  Britain's advantages included an open society, political liberty, scientific dynamism, a geographical position that favoured trade, political stability and lots of energy resources (in the form of coal). 

Modern economic growth spread out from these beginnings.  In the period 1820 to 1998, Western Europe enjoyed annual growth in GDP per capita of 1.5 per cent (not much perhaps, but over time it adds up), while the Western offshoots (US, Canada, Australia and New Zealand) grew by 1.7 percent.  Japan was the only other country in the same league with average per capita GDP growth of 1.9 per cent.  So, in arithmetic terms, Asia (except Japan) and Africa are poor because their per capita GDP growth rates were only 0.9 and 0.7 percent respectively.

More recently, with the advent of globalization, divergent economic growth rates have become more marked as East Asia and India have been the real winners of globalization.  In East Asia, the proportion of people living in extreme poverty (under $1 a day) dropped from almost 60 per cent to under 20 per cent between 1981 and 2001.  Even so, many of these people moving out of extreme poverty have only jumped one step on the economic development ladder, as the proportion living in moderate poverty has increased from 26 to 32 per cent of the population. A similar story applies to South Asia where the proportion in extreme poverty has fallen from 51 to 31 per cent, while the proportion in moderate poverty has risen from 37 to 46 per cent.

These stories are however much better than the cases of Sub-Saharan Africa where the proportion living in extreme poverty has risen, and Latin America where the situation is basically unchanged.

So, what is the state of the world. While globalization has been an important motor for poverty reduction, some 1 billion (of the world's population of 6 billion) still live in extreme poverty (less than $1 a day).  1.5 billion people are not far away, living in moderate poverty (between $1 and $2 a day).  And another 2.5 billion people are up yet another few rungs in the middle-income world.  Although they have incomes of a few thousand dollars per year, they would not in any way be recognised as middle class by the standars of rich countries.  Only one billion people of the world's population belong to the high income world.

There are many reasons why some countries fail to achieve strong economic growth, like the poverty trap, physical geography, fiscal trap, governance failures, cultural barriers, geopolitics, lack on innovation, demographic trap, and so on.  Analysis of this will have to wait for another day.

But, when you are wondering why food and energy price rises have led to such crises, it is because so many people are still living on the edge.  Globalization has lifted many people out of poverty, but to this point has only lifted them one or two rungs up the development ladder.

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