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Summary Texts for Political Economy of Development
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Summary of the required readings for political economy of development
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PED Samenvatting TekstenLes 1: The Pencil
Economies can hardly be "planned" since not one soul possesses all the know-how and skills
to produce a simple pencil. No one, can create from scratch, an everyday pencil.
There is a dispute about whether planning is to be done centrally, by one authority for the
whole economic system or is to be divided among many individuals. While the Pencil paper
shoots down the baseless expectations for central planning, it is uplifting for the individual.
Les 2: Ending Extreme Poverty: Progress, but Uneven and Slowing
The World Bank is committed to ending poverty and also promoting shared prosperity which
is translated into one of the Sustainable Development Goals (SDG).
In 2015, more than a billion fewer people lived in poverty than in 1990. Not only are there
now fewer poor people, but on average, the poor are also less poor now.
The number of people living in extreme poverty globally remains unacceptable though.
The WB has set a specific target to help guide the work in eradicating poverty: reduce the
global share of people living in extreme poverty to less than 3%. There has been remarkable
progress on this. The world is clearly on track to reach the interim poverty target of 9% by
2020 set by the WB to monitor progress toward the 2030 goal.
There are reasons for concern. The rate of poverty reduction has recently slowed. Economic
growth is a key factor in reducing poverty, but it can be volatile and difficult to predict.
Only a fraction of the growth in GDP per capita is passed through the welfare vector because
there is a divergence between growth in consumption or income observed in surveys and
the growth observed in national accounts.
How will global poverty evolve to 2030? 4 possible scenarios:
(1) Every country will grow at its average growth rate from 2005-2015.
(2) The historical average for the region.
(3) Twice the historical regional growth averages.
--> All of these scenarios assume that inequality in the country remains unchanged until
2030.
(4) Looks at when growth is pro-poor: if the bottom 40%, on average, grows faster than the
country as a whole. Each country grows by 6% annually toward 2030, but the bottom 40%
will grow 8%.
--> The three first scenarios do not come close to the target of 2030. The only scenario
where the 3% target is met is when a real annual growth rate of 6% and a shared prosperity
premium of 2% is assumed.
,Progress has been uneven. Not all regions have shared in the benefits of the global reduction
in poverty. In 2015, more than half of the global poor resided in Sub-Saharan Africa. This is a
dramatic shift from 1990 when over half of the poor were living in East Asia and Pacific.
Due to China's rapid reduction of poverty in 1990 the global poor shifted from East-Asia and
Pacific to South Asia in 2002 and Sub-Saharan Africa in 2010. In South Asia, both the poverty
rate and number of poor have been steadily declining but their contribution to global
poverty is still high.
It is indicated that there will be no matching decline in poverty in Sub-Saharan Africa.
Right now, the growth rates are: East Asia and Pacific > South Asia > Sub-Saharan Africa.
Sub-Saharan Africa has rarely exceeded 5% and has decreased in recent years. Growth is an
important driver of poverty reduction.
Throughout the 1990s and early 2000s the vast majority of poor lived in countries with
relatively high growth rates. Over the last few years the majority of poor now live in
countries with lower-than-average growth rates. As the concentration of poor moved from
high-growth to low-growth countries, this has led to a significant deceleration in the rate at
which poverty has been declining.
Furthermore, the growth elasticity of poverty has been lower in Sub-Sahara Africa. So, a
given growth rate buys less poverty reduction than in most other regions.
More than half of the countries have already reached poverty rates below 3% which is
another reason for the slowdown in poverty reduction.
As extreme poverty becomes increasingly concentrated, progress in poverty reduction will
be primarily in countries where poverty is the greatest.
Why is progress monitored towards 3% instead of 0%?
Empirically, poverty in some countries remains widespread so 3% seems feasible.
Conceptually, a poverty rate of 0% cannot be measured credibly.
The 2030 forecast indicate that attaining the 3% target will be a hard battle. Although the
percentage of poor in Sub-Saharan Africa has slowly declined, this decline has not been fast
enough to counter the growing population.
Over time, many of the countries with high poverty rates have grown out of their low-
income status and are now middle-income countries. Nearly 2/3rds of the world's poor
reside in middle-income countries today!
Half of the people living in extreme poverty in 2015 can be found in 5 countries: Bangladesh,
India, Congo, Ethiopia and Nigeria. It is not clear whether Nigeria or India has the most. Both
countries have no recent data available to measure. Furthermore, there are many ways to
ask survey’s respondents about their consumption habits. India has changed their way of
surveying which has led to less people being classified as poor.
Factors associated with poverty in Sub-Saharan Africa:
, (1) Demographic structures of the household: larger households and more economically
dependent members. A decline in the under-5 years old mortality rate + a relatively small
decline in the fertility rate has led to a quickly growing population.
(2) Growth has been less effective in reaching the poor than in other regions because of the
low elasticity.
In order to choose the right poverty reduction policies, you need to know where the poor
live, what conditions they live in and how they earn a living.
Globally, extreme poverty continues to be mainly rural (3x as high as in urban areas).
Having schooling usually leads to less poverty.
The fertility rate is usually higher among the poor.
Households surveys have a problem. They typically do not differentiate how resources are
allocated within the household, however there is inequality within the household.
Poverty is not only about income. It's about sufficient education, health, a safe living
environment and basic services as well!
Les 2: Higher Standards for a Growing World
The WB set the global target of 3% assessed by the IPL. But is the International Poverty Line
too severe a threshold for defining whether someone is poor?
(1) The value of the IPL was derived from a set of NATIONAL poverty lines. However, these
came from some of the poorest countries in the world. It can be viewed as an absolute
minimum threshold for defining poverty in all countries, so it is respectful.
(2) The IPL is fixed in real terms over time and across countries so that it ensures that the 3%
target will not be shifted.
(3) The value of the IPL is converted into local currencies using the 2011 PPP index so that
someone identified as poor in one country, is also identified as poor in other countries.
However, one source of concern is that when the NPL were constructed, 60% of the global
poor were living in low-income countries. By 2015, only 9% was. The WB has addressed this
by increasing the value.
The slowdown in the rate of poverty reduction will likely continue to decline since many
already reached the 3% target. Poverty reduction has been significant in East Asia and
Pacific, it has been much more modest in other regions.
Sub-Saharan Africa: The decline in extreme poverty coincided with nearly a 50% increase in
the number of people living in extreme poverty. The population of SSA nearly doubled over
this time period.
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