Development issues are often shrouded in a fog of jargon – “institutional capacity building”, “accountability”, “concessional lending”. The list goes on (and on and on …). But, occasionally, an idea emerges that is strikingly clear. The latest is this: End extreme poverty by the year 2030.
OK, so there’s one word in there that might need explaining – extreme. To explain, extreme poverty is usually defined as people living on less than $1.25 a day, although it also carries a sense of people lacking the most basic resources in terms of food, shelter, access to healthcare and so on. Understand that, and the fact that perhaps around 1.3 billion people worldwide live on less than $1.25 a day, and the ambition of the goal of eradicating such poverty becomes clear.
Can it be done? Growing numbers of people believe it can, including no less than President Barack Obama who, in his 2013 State of the Union speech, declared that the U.S. would join the effort to end “extreme poverty in the next two decades”.
The idea is also at the core of the latest edition of the OECD’s Development Co-operation Report, which carries the simple subtitle “Ending Poverty”. And it’s the topic of a special debate in London next week, organized by the OECD and Intelligence Squared, where speakers like Homi Kharas of the Brookings Institution and Priyanthi Fernando of Sri Lanka’s Centre for Poverty Analysis will discuss the prospects for, and challenges of, ending extreme poverty (more details below).
Despite the ambitiousness of this goal, the prospects for achieving it look reasonably encouraging. As we’ve noted before on the blog, the long-term trend of extreme poverty is downwards. In 1820, it’s estimated that around 84% of people on the planet were living in extreme poverty. In other words, only around three in 20 people weren’t poor. More recently, it’s now generally believed that the Millennium Development Goal of halving extreme poverty has already been met, ahead of the 2015 deadline (although much of this fall is attributable to large-scale poverty reduction in China).
So what’s to stop us going all the way and finally eradicating extreme poverty, possibly as part of the next round of Millennium Development Goals?
Writing in the upcoming Development Co-operation Report, Andy Sumner of King’s College, London says it’s “entirely feasible” to meet this goal, or come very close, by 2030, but only under the right conditions. One of those conditions is strong economic growth; the other is a fall in income inequality within countries.
That last point is interesting: As we’ve noted before, Andy Sumner has done some fascinating work to explain where exactly the poor live. In the 1990s, this wasn’t an issue: The poor lived in poor countries. Today, the picture is less clear-cut. Around half of the world’s poor live in China and India, both of which are now classed as middle-income countries. What happens in these countries – especially in terms of income distribution – will go a long way to determining the world’s success in eliminating poverty.
But as Andy Sumner also points out, eradicating extreme poverty won’t mean the end of poverty. The $1.25-a-day figure is just one of several poverty indicators, and a very low one at that. “Poverty does not end above one or two dollars a day,” he writes, “the risk of falling into poverty may only diminish when people reach about $10 a day.”
That point is echoed by another contributor to the Development Co-operation Report, Andrew Shepherd of the UK’s Overseas Development Institute, who focuses on the poor living in fragile states. He argues that it’s important not just to help people out of long-term poverty, but to ensure they stay out of it. Doing that, he says, requires bold action, including “unthinkable” steps like providing families with conditional cash transfers and rethinking approaches to agriculture, education, energy and employment. Policy makers, he writes, “must be prepared to borrow ideas and experiences from other societies, and to take some risks on behalf of the poorest.”
Can We Really End Poverty?, an OECD/Intelligence Squared debate, takes place on Thursday 5 December, 2013, at the Royal Institute of British Architects in London. The event is sold out, but you can join the waiting list for tickets by contacting [email protected]. The event will be streamed live starting at 7pm London time (that’s 1900 GMT, 2pm in New York, 8pm in Paris and 4am in Tokyo). You can also follow the run up to the debate on Twitter using the hashtag #PovertyDebate.
Imagine the scene reported in Der Spiegel in February 2010. A ruthless gang of kidnappers have forced their helpless victim to fax his bank and withdraw millions for them. But the victim is not as helpless as he seems. Unknown to the gang, he slips a secret message into the fax, and his banker tips off the police. A crack antiterrorist unit springs into action, surrounding a cosy villa in a sleepy holiday town. The highly-trained commandos manage to overpower the criminals, including the 74 year-old ringleader and his 80 year-old wife, along with three other pensioners. At their trial, the judge refused to believe that they’d simply invited their victim for a stay in the mountains to help him think better. Probably because they’d broken his ribs and bound and gagged him during the journey.
Why did people you’d expect to write to the paper complaining about the youth of today end up with convictions for kidnapping, torture and other serious crimes? The victim was their financial adviser and his kidnappers lost 2.5 million euros (about $3.4 million) when the subprime market collapsed, taking a substantial part of their retirement funds with it.
Despite the seriousness of their crimes, the gang did get some support, especially among people their own age, usually stout defenders of law and order. In the UK for instance, the following are typical of comments in the Daily Mail, 36% of whose readers are over 65, and 56% over 55: “OK, they shouldn’t have done it, but I can understand their frustration.” Or, “I admire these old people. They worked all their lives in order to have a comfortable retirement. To watch it all go up in smoke because of a con-man and shyster is unforgivable.”
These reactions are one expression of widespread anger against financial institutions, aggravated by the millions in bonuses their members award each other, but the financiers don’t get all the blame. Governments across the OECD urged citizens to “take responsibility” for their retirement by investing in private pensions. The financial crisis and the collapse in share prices left many people feeling they were given poor advice. They get the impression that in spite of doing all the right things, they face a bleak future.
In many cases, they’re right, especially if they’re poor or have had periods out of the workforce due to unemployment or to raise children. OECD Pensions at a Glance 2013, published today, says that the social sustainability of pension systems and the adequacy of retirement incomes may become a major challenge. “Future entitlements will generally be lower and not all countries have built in special protection for low earners. People who do not have full contribution careers will struggle to achieve adequate retirement incomes in public schemes, and even more so in private pension schemes which commonly do not redistribute income to poorer retirees.”
The OECD argues that people should work longer and save more for their retirement to ensure that benefits are adequate to maintain standards of living into old-age. Most OECD countries will have a retirement age for both men and women of at least 67 years by 2050, an increase from current levels of about 3.5 years on average for men and 4.5 years for women. Recent reforms will mean that most workers entering the labour market today will get lower pensions than previous generations and will need to save more for their retirement. Working longer may compensate for some of these reductions, but overall each year of contribution will pay out less than today.
Looking just at the figures, you could get the impression that this is a golden age for old age. Pensioner poverty shrank to 12.8% in 2010 from 15.1% in 2007, with falls in 20 countries and rises in only Canada, Poland and Turkey. Children and young people now face higher poverty rates, at 13.4% and 13.8% respectively. But old-age poverty is likely to be higher in reality. Not all pensioners who need last-resort benefits to supplement their income actually claim them, due to stigma or lack of information on entitlements. Further cuts to public services like healthcare could hurt pensioners in particular.
This grim picture of what’s in store for old people comes just after A Good Life in Old Age? another OECD warning about what to expect when you grow old if nothing is done now to change policies and practices. A coordinated barrage of depressing reports on everything that matters to “seniors” probably isn’t what the authors of Pensions at a Glance have in mind when they argue that a “holistic approach to ageing is needed”. The Pensions at a Glance editorial argues that since retirement incomes reflect employment and social conditions over the whole career of an individual, pension systems alone can’t correct inequalities and compensate for breaks during working lives.
Ageing societies will therefore need much more policy action than just pension reform. They will need much more strategic thinking around a series of questions the editorialists don’t claim to have all the answers to. What should our societies of the future look like? How will we deal with the old-age care challenge? What will be the fiscal impact of ageing and what will this mean for social protection systems and the sharing of responsibilities between the individual and the state, between public and private service providers? And how can we maintain solidarity in a context of rising inequalities between and within generations?
You can read the full report below:
Today’s post is from Adrian Blundell-Wignall, Special Advisor to the OECD Secretary-General on Financial Markets. The view expressed here is his own and does not necessarily reflect that of any OECD government.
A couple of years ago the IMF produced some (cautious) comments and studies arguing that currency management and capital controls were OK in some circumstances. Many emerging market countries took this as an endorsement of their approach to policy which has not been limited to temporary crisis measures. The Figure below shows the national investment-saving correlations for the OECD countries over 1982-2010 and for a group of emerging countries (China, Brazil, India, South Africa, Mexico and South Korea) in the manner of Martin Feldstein and Charles Horioka.
In a 1980 paper, Feldstein and Horioka looked at two views of the relation between domestic saving and the degree of mobility of world capital. If capital is perfectly mobile, you would expect there to be little or no relation between the domestic investment in a country and the amount of savings generated in that country, since capital would flow freely to wherever the returns were highest. On the other hand, if the flow of long-term capital among countries is impeded by regulations or for other reasons, investors will be more likely to keep their money in their own country and increases in domestic saving will be reflected primarily in additional domestic investment. Feldstein and Horioka’s analysis supported the second view more than the first.
Three decades later, the OECD economies have more-or-less achieved an open economy without capital controls (led in large part by Europe). But the emerging markets have a high correlation of national savings to investment (0.7), indicating a prolonged lack of openness.
National Investment-Savings Correlations: OECD versus Emerging Economies
The growing gap between the correlations for the OECD (highly open) and the emerging economies (impeded) is pointing to a fundamental imbalance in the world economy. Does it matter? The IMF study mentioned above showed that countries with stronger capital controls had a lesser fall in GDP in the post-crisis period. While the original authors were cautious in interpreting their results, this was not so for the users of those findings. This is all the more worrying given that the OECD exactly reproduced the IMF study and found that the results were not robust to a simple stability test. In other words, the OECD tests show that these results certainly should not be used as a basis for claiming some form of general support for long-term use of capital controls.
The OECD also ran a simpler study using the IMF’s own measures of capital controls, with both the IMF’s original sample period and updating it. The OECD study found significant and contradictory results, which were much more consistent with an exchange rate targeting and “impossible trinity” interpretation of outcomes:
- In the good years prior to the crisis, capital controls are indeed good supporters of growth. This is likely because combined with exchange rate management there is a foreign trade benefit, companies are not constrained for finance, and containing inflows reduces the build-up of money and credit following from exchange market intervention (and associated asset bubbles).
- However, in the post-crisis period the exact opposite is found and the results are highly significant. Capital controls are negatively correlated with growth. The pressure on the exchange rate is down, not up, as foreign capital retreats, and international reserves are used up defending against a currency crisis (contracting money and credit). Companies are more constrained by cash flow and external finance considerations. Just at the time when foreign capital is needed, countries with the most controls suffer the greatest retreat of foreign funding. Investment and GDP growth suffer.
- The full sample period (data from both before and after the crisis) shows significant negative effects of capital controls. That is, the overall net benefit appears negative compared to less capital controls.
These results have an intuitive appeal, consistent with economic theory. While it is early days, and some caution is required, the findings suggest that in the long-run dealing with the global investment-savings imbalances could be of benefit not only to developed countries, but also to the developing world itself.
Capital Controls on Inflows, the Global Financial Crisis and Economic Growth: Evidence for Emerging Economies by Adrian Blundell-Wignall and Caroline Roulet of the OECD Directorate for Financial and Enterprise Affairs
This paper discusses the issues mentioned above in detail. It investigates whether countries that had controls on inflows in place prior to the crisis were less vulnerable during the global financial crisis. More generally, it examines economic growth effects of such controls over the entire economic cycle, finding that capital restrictions on inflows (particularly debt liabilities) may be useful in good times but may have adverse effects in a crisis.
Macro-prudential Policy, Bank Systemic Risk and Capital Controls by Adrian Blundell-Wignall and Caroline Roulet of the OECD Directorate for Financial and Enterprise Affairs
This paper looks at macro-prudential policies in the light of empirical evidence on the determinants of bank systemic risk, and the effectiveness of capital controls. It concludes that complexity and interdependence is such that care should be taken in implementing macro-prudential policies until much more is understood about these issues.
If you’ve ever seen the inside of a doctor’s office, never mind an operating room, you’re probably interested in healthcare. But how much do you actually know? Take this test based on the latest edition of the OECD’s Health at a Glance.
You’ll find all the answers here:
First there was the crisis, then the long downturn, and now—let us hope—a labour market recovery. And as Britain and America enter the third phase of a painful economic story, a new question is coming to define political debate: how will the proceeds of the recovery be shared? The answer to this question will depend partly on the policy choices that are made in coming years. But it will also depend on underlying labour market dynamics. What kinds of jobs are mature economies creating in the early 21st century? And how have jobs markets changed since 2008? Last week a new report from the Resolution Foundation threw new light on these questions, suggesting that the downturn may have intensified an erosion of middle-skilled jobs that was already apparent before the crisis struck.
The new analysis looks at how the UK and US jobs markets were reshaped from 2008 to 2012 in a number of ways. First, it looks at how the employment shares of different occupations rose and fell in these years. From 2008 to 2012 the crisis appears to have hit middle-skilled occupations harder than others, accelerating a trend of occupational polarisation already established in academic literature. Figure 1 shows how occupations, ranked from low-skilled to high-skilled, saw their share of UK employment change over the four years. The pattern is clear: a relative decline of middle-skilled jobs while low- and high-skilled jobs expanded. Similar results are seen in the US.
Figure 1: The changing shape of the UK jobs market after the crisis
Change in Log (Employment) across the skill-distribution of UK occupations, 2008-2012
Notes: Skill percentiles are defined on the basis of mean wage in 2002. See Box 1 and Annex A in the full report for full methodology.
Source: Resolution Foundation and Centre for Economic Performance analysis, Labour Force Survey
Second, for the UK, the analysis reveals how the crisis has affected jobs differently depending on the types of tasks they involve. It finds that, in the UK at least, the downturn continued an erosion of routine occupations that was apparent before the crisis struck. Figure 2 shows levels of employment in routine and non-routine occupations in the UK from 2007 to 2012. While employment fell in routine occupations throughout the period, employment in non-routine roles actually rose throughout the downturn. Interestingly, real wages show the opposite pattern; they fell faster in non-routine jobs than in routine jobs. While the reasons for this are not entirely clear, it may be that employers sought to hold on to non-routine workers, doing so partly by squeezing their pay.
Figure 2: Impact of the crisis on routine and non-routine jobs
Employment, millions, 2007-2012
Notes: ‘Routine’ occupations are those in the top third of routine-intensity, ‘middle routine intensity’ relates to occupations in the middle third of routine-intensity, and ‘non-routine’ relates to occupations in the bottom third of routine-intensity. See Annex B of the report for full methodology for defining routine-intensity.
Source: Resolution Foundation and Centre for Economic Performance analysis, Labour Force Survey and O*Net dictionary of occupational information
Third, in both the US and UK, the downturn has played out very differently in different industrial sectors. In both economies, the middle-paying third of sectors appear to have seen employment fall from 2008 to 2012 while low- and high-paying sectors saw employment rise. In both cases, these broad patterns mask significant variation in the performance of specific sectors. In the UK in particular, there have been standout successes at the top and bottom of the labour market. At the top, Business Activities grew 15.5 per cent from 2008 to 2012 as net employment rose by 460,000. Meanwhile at the bottom, Hotels and Restaurants, the UK’s lowest paying sector, grew faster than any other sector from 2008 to 2012, seeing employment rise by 17.1 per cent.
Figure 3 shows equivalent analysis of patterns in employment by industry for the US, where similar patterns to the UK can be seen. Employment fell in all six of the middle-paying sectors of the US economy from 2008 to 2012, while it rose in all but one of the six lowest paying sectors. Meanwhile, in both the US and UK, there were also clear impacts from the collapse in demand between in 2008 and 2012, most notably sizeable falls in employment in Construction and Manufacturing.
Figure 3: The shifting industrial make-up of US employment after the crisis
Source: Resolution Foundation and Centre for Economic Performance analysis, Current Population Survey, National Bureau of Economic Research
How should we interpret these findings? Certainly it is easy to overstate what is happening. Middle-skilled jobs are not ‘disappearing’ from the UK and US labour markets, either before or after the crisis—they are simply declining as a share of employment. Moreover, even as middle-skilled occupations see a relative decline, demand for middle-skilled workers will remain high as new cohorts are required to replace those retiring each year. And it is also important not to assume that a polarising labour market necessarily means rising wage inequality. This link is far from straightforward. A polarising labour market could mean rising wage inequality, as more workers are pushed into the two ends of the labour market. But it could also mean falling inequality if, for example, rising demand for low-skilled workers pushed up their pay, and the supply of high-skilled workers rises fast enough to meet growing demand.
But the bigger debate initiated by these results is over their causes. On the one hand, there will be those who argue that these findings simply reflect where we are in the economic cycle. We might expect top jobs to have been protected more than others from the downturn, while low-skilled jobs may be the first to have gained from a gradual return to growth. Middle-skilled jobs may yet bounce back. And of course, big falls in industries like construction are likely to reflect a temporary collapse in demand. On the other hand, there is also a deeper, more structural explanation for some of these trends. The sectors of health and social care are growing, and the collapse of routine jobs in the UK is hard to explain without some reference to the impact of technology. There may yet be deeper trends at work here, even if they are dominated by demand in the short-term. As the UK and US economies enter a third, recovery phase, these questions will become key to understanding how the proceeds of that recovery will play out.
The latest economic forecasts from the OECD could be summed up in four words: More growth, more risks. The “more growth” part is perhaps the easiest to explain. According to OECD economists, the world economy should continue to strengthen its recovery over the next couple of years, albeit at a slower pace than in previous recoveries. The OECD is forecasting global growth of 2.7% for this year, rising to 3.6% for 2014 and 3.9% in 2015.
These numbers might look encouraging, but they’re down – by about half a percentage point – since the OECD’s last forecasts in May. That downward revision is due in large part to the slowing performance of the emerging economies, other than China.
Digging a little deeper, the OECD is forecasting a strengthening performance in both the United States and the euro zone, with the U.S. economy forecast to grow by 2.9% in 2014 (click on the map below for detailed data). The euro zone won’t be able to match that pace, but next year’s forecast expansion of 1% would certainly be welcome after several years of sluggish performance. By contrast, after racking up forecast growth of 1.8% this year, Japan’s pace of expansion is tipped to slow to 1.5% in 2014.
Disappointingly, the upturn in OECD economies may not do much to bring down unemployment. The jobless rate in OECD countries is projected to fall by only half a percentage point, to 7.4%, by the end of 2015, a slower decline than had been expected.
Of course, all these forecasts will only pan out if the world economy manages to avoid those risks we mentioned. Some of these will be all too familiar to regular readers of the blog, such as continued concerns over Europe’s banks. Others have emerged more recently – indeed, they’re responsible in large part for the OECD’s lowering of its growth forecasts.
The most notable, perhaps, is the increasing uncertainty over the emerging economies, other than China. Even though the emerging economies have stronger growth prospects than developed countries, they face a growing list of challenges, including less favourable demographics and diminishing opportunities for “catch-up” growth. Their vulnerability was highlighted over the summer when investors pulled out of emerging economies in expectation that the Federal Reserve, or U.S. central bank, would begin returning to the sort of “normal” monetary policies that were suspended in response to the financial crisis. In the event, that didn’t happen, but, as the latest OECD Economic Outlook points out, the turmoil that followed even discussion of it “revealed how sensitive some EMEs [emerging market economies] are to U.S. monetary policy.” For now, the situation in the emerging economies appears to have stabilised, but there must be concerns over what will happen when the U.S. does eventually change course on its monetary policy.
On a long list, two other risks are also worth noting briefly. The first concerns the political situation in the U.S., which has led to a series of showdowns between legislators and the executive. “The episode of budget brinkmanship in October 2013 has once again shaken global markets and harmed consumer confidence,” notes the Economic Outlook. To avoid a repeat, it says, “The debt ceiling needs to be scrapped and replaced by a credible long-term budgetary consolidation plan with solid political support.”
And then there’s the concern over the potential for deflation in the euro zone. To explain, prices tend to rise most of the time in developed countries – a process called inflation. By contrast, falling prices – or deflation – are much less common. If deflation kicks in, it can be very hard to turn it around – consumers may put off purchases in expectation of lower prices next month or next year, so reducing demand and creating a self-sustaining spiral. To reduce the risk of deflation taking hold, the European Central Bank cut interest rates earlier this month, which should boost demand. But, says the Economic Outlook, it should be prepared to take further measures if deflation risks intensify.
OECD Economic Outlook (2013, Vol. 2)
Tomorrow, November 19, is World Toilet Day and to celebrate I thought I‘d tell you how I fooled God when I was about four. I was playing outside and needed to go to the toilet, urgently, but realised I wouldn’t make it home in time and guessed that peeing outside was probably a sin. But in my personal theology, God was like a geostationary satellite observing the Earth from high in the sky, so I figured that if I hid under the overhang of a roof while I did the dastardly deed, I’d be OK. My relief was short-lived though as I saw with horror that I would be betrayed by the trickle seeping out into the open and He’d see me as soon as I quit my hiding place. So I edged round the building, back to the wall, then casually strolled away on the other side, whistling innocently, and leaving the Almighty to solve the mystery of the phantom pee.
It’s amusing now, but for hundreds of millions of people the world over, not being able to go to a toilet still has far more immediate consequences than divine retribution. 2.5 billion people don’t have access to a clean and safe toilet, so they improvise. For 1.1 billion people, the solution is open defecation, a practice that poses a major threat to human health, but also to economic and social development, as well as being an affront to human dignity.
As the 2010 Millennium Development Goals Report points out, indiscriminate defecation is the root cause of faecal-oral transmission of disease, which can have lethal consequences for young children. In this article, we gave the figures for what that means: in any given week, around 30,000 children under the age of five will die from water-related diseases, that’s one every 20 seconds. Unsafe water now kills more people than all forms of violence, including war, with diarrheal diseases claiming 1.8 million victims a year and causing more deaths in children under 15 than the combined impact of HIV/AIDS, malaria, and tuberculosis.
Sanitation is also a gender issue. Women and girls have a greater need for privacy than men and boys when using toilets and when bathing. Inaccessible toilets and bathrooms make them more vulnerable to rape and other forms of sexual violence, especially if they have to walk long distances at night.
If they live in rural areas of developing countries, they also face a greater risk of being attacked by animals in the bush because women and girls tend to move quietly in order to be discreet. Snakes and other animals are then not scared away and are more likely to be surprised by the women’s presence and bite them. The solution is often to use “flying toilets” – human waste disposed of in plastic bags thrown into the open, a double source of pollution from both the wastes and the plastic bags.
Women and girls also have a much greater need for privacy and dignity when menstruating, and the taboos surrounding this in many cultures make the problems worse. Separate toilets for girls in school, for example, mean more girls are likely to attend classes in the first place, and more girls are likely to stay after puberty to complete their education. The World Toilet Day website puts it like this: “In many countries, girls stay home during their menstruation days because the absence of a safe place to change and clean themselves makes them feel unsecure … Besides the emotional stress, poor menstrual hygiene often leads to health problems such as abdominal pains, urinal infections and other diseases.”
Catarina de Albuquerque, UN expert on the right to safe drinking water and sanitation agrees: “Women and girls place higher value on the need for a private toilet than men, and thus are often willing to devote household resources to gaining such access. However, women are rarely in control of the household budget, and access to sanitation remains a low priority in many parts of the world.”
Unless policies and practices change significantly, the number of people without access to basic sanitation is expected to grow to 2.7 billion by 2015 and the world will miss the MDG target of halving the proportion of people without access. Almost 1.5 billion will still not have access to improved sanitation in 2050. The consequences for water quality are severe and made worse by the fact that progress in treating wastewater does not always keep pace with progress in collecting it, resulting in new sources of nutrients and pathogens being dumped untreated.
Issues related to water and sanitation are a priority for the OECD and you can find information here on our World Toilet Day webpage on a range of topics, including health impacts. A number of people working at the OECD are also involved through our War on Hunger Group. For example, last year the Group funded a project in Mozambique to reduce diarrhoea by at least 25% in children under the age of five by training in hygiene and changing current practices. The project also improves access to drinking water and to sanitation through the construction of protected water points and 60 family latrines. It contributes to the sustainability of the protected water points by establishing local maintenance services.
Colleagues from the War on Hunger Group told me that you need to accompany the building programme with education. Their experience suggests that, in some countries, the toilets are used as a much appreciated shed or store room, and people continue to go to the fields. The problem is the cleaning, which in some places can only be done by certain (often stigmatised) groups, such as untouchables in India.
If you’re wondering what you can do, Matt Damon has an idea:
The War on Hunger Group helps people tackle a number of problems that we in the developed countries never have to worry about, for example the fact that air pollution from cooking will soon kill more people in developing countries than malaria, tuberculosis or HIV/AIDS. This article from the OECD Observer describes how WHG contributing to a solution
* Insert your own joke about making a splash, flushed with success, etc