Reducing relative poverty

Reducing poverty is widely viewed as a key objective of a good society. The U.K.’s Labour government set a formal poverty reduction target in the late 1990s, and the European Union recently did so as well. In the United States, public opinion surveys consistently find a solid majority saying government spends too little money on assistance to the poor.

The standard poverty measure in comparisons of rich nations is a “relative” one. The poverty line for each country is set at a percentage, usually 60% or 50%, of that country’s median household income.

Which countries have been most successful in reducing relative poverty in recent decades? And how have they done it? Here’s what the picture looks like for twenty affluent nontiny longstanding democracies. The data are from three sources: the Luxembourg Income Study (LIS), considered the most reliable for comparative purposes; the European Union’s Statistics on Income and Living Conditions (EU SILC), which covers recent years for EU countries; and the OECD.

As it turns out, there is hardly any success to explain. In almost every one of these nations the relative poverty rate was no lower in 2007, the peak year of the pre-crash business cycle, than at the end of the 1970s. The only clear exception is Ireland. Denmark also reduced poverty according to the LIS data, but the OECD data suggest little or no change. Portugal is another possibility. A few countries succeeded in reducing relative poverty during certain portions of this period, such as the U.K. in the early 2000s.

What accounts for this near-universal failure?

A relative measure of poverty is essentially a measure of inequality in the lower half of the income distribution. A nation’s relative poverty rate is determined largely by three things: wage inequality among individuals in the bottom half of the distribution, employment inequality among households in the bottom half, and the generosity of the public safety net. The wage distribution has become more unequal in many countries, though by no means all. This owes to a host of developments, including globalization, deregulation of product and labor markets, manufacturing decline, weakening of collective bargaining, and increased immigration of people with language barriers and/or limited job skills. The trend in employment likewise has tended to be inegalitarian, depending on the magnitude and character of the rise in single-adult households, the movement of women into jobs, and government efforts to promote employment. Government transfers have increased in a number of countries, but often only enough to offset the rise in market inequality. And in a few nations transfers have stagnated or decreased. (More discussion here, here, here, here, and here.)

I prefer a focus on absolute incomes and living standards rather than on relative poverty, and that approach yields a very different conclusion about progress in recent decades. Still, the widespread failure of rich countries to make any headway in reducing relative poverty rates is striking.

6 thoughts on “Reducing relative poverty

  1. Does relative poverty or inequality matter in a Rawlsian sense? The justice of an institutional scheme is to be assessed by how well its least advantaged participants fare.

    Who cares how rich the rich are if the poor are better-off.

    Rawls wrote that economic inequalities should only be permitted if they are to the benefit of society, and especially if they are to the benefit of its least advantaged members

    Economic development in Japan, the Asian tigers, and China and India did not break out of their grinding absolute poverty by worrying about relative poverty at any one slice of time.

    Their prosperities came through the scattered efforts of innumerable individuals. They made themselves wealthy through trading in increasingly open market. The main contribution of their governments was to lessen the dead hand of socialism, feudalism and mercantilism.

  2. It is hard to know what to make of a comment that China and the Asian tigers succeeded by lessening the dead hand of mercantilism given that their success was underwritten in large part by government policies of closing markets to imports while fostering export industries, at least during the pre-WTO/developmental phase. What is China’s renminbi policy if not mercantilism?

  3. Anchard,

    the chinese had excellent policies for closing their markets to imports, suppressing exports and increasing poverty. these policies were called communism.

    after giving communism a miss, China’s global trade now exceeds $2.4 trillion at the end of 2008. It first broke the $100 billion mark in 1988, $200 billion in 1994, $500 billion in 2001 and $1 trillion mark in 2004. exports and imports kept track.

  4. But it’s not as though they flicked a switch at some point and poof, no more communism. In truth, both China and its neighbors pursued a heavily state-driven form of liberalization (much like the US in a similar stage of its own development) that allowed them to build local export leaders while shielding them from global competition.

    The Asian approach had elements of both communism and capitalism, so calling it solely either is to miss what they actually did.

    Looking only at China, on p. 150 of Rodrik’s new book on globalization he goes into detail on the hybrid approach under Deng, beginning with agriculture. Rather than simply abolishing the framework of fixed prices that both stifled innovation but also ensured affordable food for people in the cities, “the Chinese solution to this conundrum was to graft a market system on top of the plan” so that there was a transition. The result was higher output, better price incentives, and stability, which Rodrik asserts set China on the path to growth (this is in keeping with Timmer’s description of the classic industrializing transition through improvements in agricultural productivity – sorry I don’t know how to embed a link, so the paper is here: He goes on to say:
    “Another problem was how to provide a semblance of property rights when the state remained the ultimate owner of all property. Privatization would have been the conventional route, but it was ruled out by the Chinese Communist Party’s ideology. Once again, it was an innovation that came to the rescue. Township and village enterprises (TVEs) proved remarkably adept at stimulating domestic private investment. They were owned not by private entities or the central government, but by local governments (townships or villages). TVEs produced virtually the full gamut of products, everything from consumer goods to capital goods, and spearheaded Chinese economic growth from the mid-1980s until the mid-1990s.
    The key to their success was that local governments were keen to ensure the prosperity of TVEs as their equity stake generated substantial income for them. Local authorities gave private entrepreneurs considerable freedom and also protected them from challenge – most critically from the local Party bosses themselves…”

    All of which is to say, yes, they have made enormous gains by moving toward capitalist modes of enterprise, but that success was also due to their very skilled way of managing the adjustment gradually by using a mix of the old and the new, and also that the spectacular growth started during that adjustment period of mixed methods.

  5. Thanks for your long comment.

    It is easy to manage adjustment the previous policies were just so bad that any move toward the market was an improvement.

    Parente and Rios-Rull found in The Success and Failure of Reforms in Transition Economies that an important reason why Russia’s performance and China’s performance under capitalism have differed dramatically was that different institutional arrangements governing the determination of prices and work practices evolved during their transitions.

    In Russia, the arrangements conferred monopoly rights to industry groups left over from socialism, prevented the adoption of better technology. (The new boss was the old boss).

    In China, the arrangements that evolved contained no such monopoly elements.

    The key factor in determining which arrangement evolved was the strength of the central government in preventing local governments from erecting barriers to entry on behalf of their constituents

    Inequalities in Russia are driven by government monopoly rights, while in China, success in market competition is more important.

  6. JIm, sorry for the lag, RL intervened.

    Thank you for directing me to that book – it sounds fascinating (and reminds me that I need to read the Acemoglu/Johnson/Robinson paper on the same topic). I’m working on something on the role of markets in the food crisis as it relates to prior development policy, and have been struck in my readings by the poor performance of institutions throughout – national, supranational, you name it, they seem to have failed. So the Parente book will be a big help.

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