Poverty

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A homeless man in Paris, France.

The dismal science Economics

Economic systems

$  Free market   €  Social democracy   ☭ Socialist economy

Major concepts

Third World Usury Too big to fail Demand curve Capitalist realism

The worldly philosophers

John Maynard Keynes Timothy Geithner Dick Armey Kenya Kura v - t - e

Poverty is the inability to provide for one's well-being — that is, being too poor to obtain adequate food, shelter, clothing, or healthcare.

Categorizing poverty[edit]

There are many ways to categorize poverty. Here are some of the most common:

Relative poverty[edit]

Relative poverty is judged by local standards. I.e., someone with a medium sized house, a decent car and a good wage may not be poor, per se, but they would be relatively poor if they lived in an estate full of millionaires and all the nearby shops were suited to those super rich. Or, as economist John Kenneth Galbraith wrote, "People are poverty stricken when their income, even if adequate for survival, falls markedly behind that of their community."^[2]:577 Individual countries will have their own official "poverty lines" (often called "bread lines") which people can live above or below.^[3]

Extreme poverty[edit]

Not all poverty is the same, and some poor people are even worse off. Extreme poverty is defined as surviving on less than $2.15 per person per day at 2017, the so-called the International Poverty Line (IPL).^[4] This is a situation where not only people don't have enough to live a dignified life: they often face immediate risk of death by starvation.

While being widely used, the method of using the IPL to calculare extreme poverty has seen some criticism too. A study published in 2024 by the Nature journal, for instance, claimed that the IPL resulting statistics does not perform acceptably well in terms of accuracy and precision, while arguing that adoption of alternative methods for monitoring global poverty should be considered.^[5] Another limitation of this method is the fact that that there's often a gap between national poverty lines and the IPL.^[6]

Multidimensional poverty[edit]

While income means a lot, it doesn't mean everything. The Multidimensional Poverty Index (MPI) was created in 2010 by the United Nations, along with the University of Oxford, to use a wide ranger of indicators in order to measure poverty. The indicators are health (measured by nutrition and child mortality, education (measured by years of schooling and school attendance) and living standards (measured by cooking fuel, sanitation, drinking water, electricity, housing and assets).^[7]

Taking inspiration in the MPI, the World Bank also created their "Multidimensional Poverty Measure", focusing on income, education and access to basic infrastructure.^[8]

Disparities[edit]

While Asia managed to tackle extreme poverty very quickly in the last few decades, sub-Saharan Africa still has a long way to go.

The distribution of poverty is very uneven:

• In 2021, more than 50 per cent of the Saharan African population was multidimensionally poor. South Asia also had a very high rate of multidimensional poverty, around 30 per cent, though it's dropping faster.^[9]
• Poverty is also correlated with age, with the youth being generally poorer. In 2022, children were more than twice as likely as adults to live in extreme poverty. They comprised more than half of those living in extreme poverty, while their share of the population was 31 percent.^[10] In 2019, around 50 per cent of the world's multidimensional poor were under the age of 18 years of age while 75 per cent are under 40.^[11]
• There are more poor women than poor men. In 2022, around 383 million women and girls lived in extreme poverty compared to 368 million men and boys.^[12]
• Rural areas are generally poorer. In 2021, about 80 per cent of those living below the poverty line lived in rural areas. In the same year, 20 per cent of rural people lived in extreme poverty. The rate for urban areas is around 5 per cent.^[13]
• National data on income poverty disaggregated by disability remain scarce, but available data shows that the proportion of persons with disabilities living under the national or international poverty line was in some countries twice as high as that of persons without disabilities.^[14]

Historical trends[edit]

Last Belongings by Aleksander Kotsis. Painted 1870.

The Malthusian era[edit]

From the Neolithic Revolution to the Industrial Revolution very little happened. Many studies^[15][16][17] have shown that human life in the whole world was, for most people, as Thomas Hobbes wrote on his Leviathan, “solitary, poore, nasty, brutish, and short”.^[18]:192

Why was the world so poor back then? The best explanation was perhaps posited by the economist and cleric Thomas Malthus: Let’s imagine a pre-industrial age village where the inhabitants devise a more efficient way to grow their crops, increasing their ability to produce food. At first, the villagers’ diets would improve as they would be able to eat more. Moreover, it is possible that they would be able to trade their surplus. It is even possible that the abundance of food might enable them to reduce their work and have more leisure. As a result, their living conditions would rise. Nonetheless, such surplus, Malthus argued, would allow them to sustain more children. The village’s population would then grow. As the land available for cultivation within the village is necessarily limited, this population growth would gradually result in a reduction in village’s food surplus. Living standards would then begin to drop after the initial rise that we saw and would only stop falling once the ratio of food per person returned to its original level. In other words, the technological progress would, in the long term, lead to a larger population, but not a richer one.^[19]:28-30

The Great Divergence[edit]

However, in the late 18th century and especially in 19th century, some countries managed to break the mold. It started in the UK, then it spread to the Northern Europe, also reaching the United States and finally Japan. The accumulation of physical and human capital, and especially technological progress, became exponential and allowed the labour productivity to skyrocket, making some countries escape from the Malthusian trap.^[19]:27-41 It wasn’t, of course, the first time that a society managed to innovate and raise productivity. These efflorescences, however, ended up with the creation of new institutions that developed another inertial state where technological innovation slowed, and economic and political elites sought to defend existing social patterns.^[20] For the first time in human history, there was self-sustained, stable economic growth and improvements in the quality of life.

This growth was, at least at first, however, extremely uneven, being confined in a few countries. Throughout most of the human history, the gap between the rich and the poor was never so wide. After the Industrial Revolution, even a poor westerner tended to be richer than the average person living elsewhere. In 1820, the G7 share of global income soared from 20 per cent to over 60 per cent in 1990.^[21] This growth disparity is called by historians and economists as the “Great Divergence”.

Convergence?[edit]

It’s true that some countries in Asia and especially in Africa still have a lower income per capita than the UK had over 200 years ago.^[22]:2 However, the last decades of the second half of the 20th century finally saw much of the rest of the world taking off, and inequality between countries dropped for the first time since the Industrial Revolution.^[23][24][25] The Multidimensional Poverty Index found that 25 countries managed to halve multidimensional poverty between 2007 and 2022, with populous Asian countries such as China, Indonesia and above all India, doing much of the work.^{[note 1][26]} This reversal has been called “The Great Convergence” by analysts and scholars.^{[27][28][29][30]}

The future[edit]

While the last decades saw the sharp rises in the standards of living, poverty (including extreme poverty) will probably still remain a major problem in the next years. A UNU-WIDER report predicted that, in 2030 over 600 million people in the world will remain in extreme poverty, while 665 million people will still be undernourished, with many other problems, such as the lack of access to clean water and basic sanitation still prominent in sub-Saharan Africa and low-income countries.^[31] Longer term forecasts are more optimistic, with one study claiming that extreme poverty may finally be eradicated by 2050, spurred by economic growth in low-income countries.^[32]

Causes of poverty and keys to development[edit]

“”Once one starts to think about them, it is hard to think about anything else.

—Nobel Memorial Laureate economist Robert E. Lucas on the causes of development.[33]

Northwestern Europe was behind other parts of the rest of Eurasia for centuries following the fall of the Western Roman Empire, so it's hard to claim that the Western economic dominance was inevitable.^[22]:130 This of course raises some questions. Why did the the Great Divergence start in Northwestern Europe, especially in Britain? Why not Southern Europe, which dominated the continent's economy for centuries before the Industrial Revolution instead? Or China which was technologically dominant until around 1500? Why didn't the pace of innovation slow down, as occurred in prior growth spurts around the world? And more importantly, can other countries do the same? All these questions are still subject to much controversy, but there are some answers.

Geography[edit]

Geography is a pessimistic explanation to development. After all, geography doesn't change a lot as plate tectonics are very slow. And yet, the richest places on Earth have changed. When the Romans conquered Britain, the local people were living in a situation close to the Stone Age, but the Industrial Revolution started there. While geography is important, there might be something else.

Culture[edit]

According to Harvard anthropologist Joseph Henrich, culture is defined by the body of practices, techniques, heuristics, tools, motivations, values, and beliefs that everyone acquires while growing up, usually by learning from other others around you.^[35]:3 Culture is a relatively old explanation for disparities between rich and poor nations, being advanced, for instance, by the sociologist Max Weber on his famous book The Protestant Ethic and the Spirit of Capitalism, first published in 1904.

More recent studies have claimed that values such as praising hard work, risk taking, and wealth accumulation were essential for northwestern Europe's take-off in the 17th and 18th centuries. According to proponents of this idea, one of the primary impediments to development in history was the way people thought and talked about work and profit, and how a society that frowns upon hard work will be unlikely to have a meaninful number of innovators. For the ancient Greeks and Romans, for instance, if you were successful, you were supposed to strive to own a landed estate and live off of its returns, and work of any type was one of the the lowest-valued pursuits. Wealth was only valued when it could permitted leisure. Cultural values that disparaged hard work persisted during the Middle Ages among the European elite.^[22]:68-9

Just like geography, culture is hard to change. As anthropologists Peter J. Richerson and Robert Boyd describe it: “[T]he wheels of cultural evolution roll on the time scale of millennia, even though, when we look closely at any one society over short periods of time, change is often readily perceptible.”^[36] So, for the same reasons as geography, while culture can play an important role, it can't be the only explanation of development.

Insititutions[edit]

The United States Congress: electoral democracies, in general, fare better than autocracies.

According to the Nobel Memorial Prize laureate economic historian Douglass North, institutions are "humanly devised constraints that structure political, economic, and social interaction. They consist of both informal constraints (sanctions, taboos, customs, traditions, and codes of conduct), and formal rules (constitutions, laws, property rights".^[38] Saying that political, legal and economic institutions matter seems to be obvious to most people. A better question is, which institutions foster development. The division of the North Korea and the South Korea was almost a controlled experiment. The disparities between the two countries are neither the result of geographical or cultural differences, as, for most of the past centuries, the Korean Peninsula largely formed a single social entity, whose inhabitants shared a common language and culture. North Korea’s poverty and technological underdevelopment, just like that of East Germany prior to the fall of the Berlin Wall, originates in political and economic institutions that restricted personal and economic freedoms. The lack of constraints on government power, the absence of the rule of law, the insecure property rights, along with the inherently inefficient central planning, have hindered entrepreneurship and innovation, while encouraging corruption and fostering poverty.^[19]:144 It is no surprise that the South Korea income per capita is many times higher than the one in North Korea,^[39] with differences in other indicators, such as life expectancy, being just as drastic.^[40] But why do liberal democracies tend to do better at development? Basically, they tend to invest more on public goods related to healthcare and schooling, reduce social unrest, and especially, they enact economic reforms better than nondemocracies.^[41]

Extractive elites aren't always part of the government and sometimes arise from the rest of the society. It is important that the institution and the rules of the game are be the same for everyone. The way Bill Gates and the Carlos Slim became two of the richest men in the world mirrors the difference between the institutions in the US and in Mexico. Slim didn't become rich by innovation, but by his political connections. He bought the privatized Telmex not by paying out of his pocket, but by using dividends of the Telmex itself to pay for the stock. Attempts to challenge his monopoly in his country failed. Meanwhile, Gates' Microsoft had a hard time for its abuses of anti-competitive practices and monopoly power, even if less than some people demanded.^[42]:39-40

But how institutions emerge? There is no defining answer to that question, which doesn’t mean that history can’t teach us anything about them.

Institutions are, of course, often imposed by the government. The Meiji Restoration, for instance, saw Japan adopting many Western institutions. In the first five years after the revolution, Japan created and adopted institutions such as a prefectorial system of administration, a postal system, a daily newspaper, conscription, its first railway, religious toleration and the Gregorian calendar. A representative system of local government was inaugurated in 1879, and ten years later a new constitution set up a bicameral parliament.^{[43] :843} Japan didn't copy only "good" institutions though: they also tried to copy European colonialism and imperialism, believing it was a good thing,^[44], showing that just copying institutions is not that easy since we often don't know what are the good and bad institutions. Speaking of colonialism, it is possible from a foreign power to impose institutions in another nation – and those imposed institutions can still explain aspects of poverty and wealth in many countries around the world. We can contrast, for instance, the institutions perpetuated by the Spanish conquistadors, such as the Mit'a, with colonies such as the US and Australia, that inherited the English legal system, and became some of the richest nations in the world.^[45]:152-54 In Africa, however, British rule was very different, imposing many extractive institutions that hung on and often grew stronger after independence.^[42]:336

A more evolutionary way of developing institutions is by spontaneous order. This comes to the notion that no group of individuals knows enough to plan and devise institutions – but society might have enough information to do so. Institutions should arise, according to proponents of this perspective, not by human design, but by human action.^[46]:96 The most obvious example of this is the language. No one designed the most widespread languages in the world, they evolve alone, but they work very well as forms of communication, and spelling reforms are relatively uncommon. This, according to the Austrian School economist and philosopher Friedrich Hayek, also applies to the legal system. The role of the lawmaker, as Hayek said in his Nobel lecture, is “not to shape the results as the craftsman shapes his handiwork, but rather to cultivate a growth by providing the appropriate environment, in the manner in which the gardener does this for his plants.”^[47] In other words, institutions can emerge organically through the interactions of individuals within a society, rather than being imposed top-down by a centralized authority. While this strong emphasis on the common law might have fell out of favor, it was very frequent throughout history. The seminal Code of Hammurabi was declaration of existing law that Hammurabi assembled, but not created.^[43]:63-64. This is also the case of the Draco's code in Athens and the Twelve Tables in Rome.^[48]:143 According to legal scholar Patrick Atiyah, before the Reform Act of 1832 in England, most people considered that law was not something “made”, but something that was “there”, waiting interpretation, that didn’t really need constant change.^[49]:96

Finally, sometimes crucial institutions even appear by accidents that can hardly be controlled by humans. The Black Death, despite its catastrophic results, is often regarded as one of the reasons for the rise of the England and the Western Europe. By wiping out around half of the population, the plague shook the foundations of the British feudalism, creating a massive scarcity of labor, encouraging peasants to demand changes, such as higher wages, allowing the region to escape from the feudal order.^[42]:98 And why didn’t the same thing happen in Russia and Eastern Europe, places where the Black Death also hit hard? Because in Eastern Europe towns were weaker and less populous, so peasants had less options and places to go, while lords were better organized. As a result, Western Europe broke the sefdom cycle, while forced labor became even more prominent in Eastern Europe.^[50]

While it is still hard to change institutions, it's probably easier to change them during a human lifespan than culture and geography, such as South Korea shows, and the results can be astonishing.^{[note 2]} Nonetheless, even though institutions are beyond important, even them can't explain everything. Italy has been a single country for well over a century, with all regions having, at least in theory, a the same legal framework. And yet, the Southern italy is much poorer than Northern Italy. Some scholars have argued that this gap could be explained in part because of cultural differences, such as trust levels been lower in the south.^[51] Others have, however argued that there are meaningful institutional differences between the two regions.^[52] Another refutation to the institution explanation is China. Once one of the poorest countries in the world, China saw its living standards rise fast in the last few decades,^{[note 3]} and this only happened after the country adopted many institutions that, in theory at least, enact development, such as privatization, a civil code with elements of the German law and relative respect for property rights.^[22]:218 But it didn't adopt all of them, still being a dictatorship, and its respect to property rights still leaves much to be desired when compared with countries that didn't grow so fast. And while the Chinese economy has faltered after the covid-19 pandemic,^[55] it's still seemingly in better shape than proponents of the institutional explanation such as the MIT economist Daron Acemoglu, who predicted in 2012 on his book Why Nations Fail, almost a decade before the pandemic start, a huge slowdown on China.^[42]:462

Demographics[edit]

Conclusions[edit]

See also[edit]

• Economic inequality

Notes[edit]

References[edit]