Wealth Creation Is Another Name For Poverty Reduction
James Picerno | Jan 17, 2017 07:10AM ET
How much lower would the world’s poverty rate be if Warren Buffett’s skills in identifying value in the corporate sphere had evaporated decades ago? How many fewer families living hand to mouth would be suffering if, in 1980, IBM (NYSE:IBM) didn’t offer a young Bill Gates and his fledging company the opportunity to develop an operating system for Big Blue’s then-radical idea of producing personal computers for the masses?
No one knows the answer, of course, since those events never took place. But we can speculate, and on that basis it’s hard to imagine that poverty would be lower because both men were now living comfortable but uneventful lives as upper-middle class citizens. But Oxfam International would like you to think that there’s a clear and direct link between reducing the number of super successful entrepreneurs and people living in poverty.
“New estimates show that just eight men own the same wealth as the poorest half of the world,” Oxfam charges in a new report published this week, based on Forbes’ data base that tracks billionaires. “As growth benefits the richest, the rest of society – especially the poorest – suffers,” the group writes in “An economy for the 99 percent.”
Oxfam’s executive director, Winnie Byanyima, tells The New York Times that “it is obscene for so much wealth to be held in the hands of so few when 1 in 10 people survive on less than $2 a day.” She asserts that “inequality is trapping hundreds of millions in poverty.”
Reality, however, is more complicated than Oxfam’s narrative implies. Reducing the net worth of the wealthy, either after the fact or as a policy going forward, is unlikely to solve the crisis that is poverty, which has been around for far longer than savvy investors and tech entrepreneurs have been plying their trades. But this much we know: the single-biggest source of poverty reduction is directly bound up with wealth creation, which is a direct function of capitalism, warts and all.
No one should confuse the free enterprise system with perfection or an easy ticket to eliminating poverty. The number of things that are wrong with capitalism in its current form could fill a small library. But capitalism, fueled by the globalization in recent decades, has been instrumental in taking a bite out of the planet’s poverty rate.
Consider the World Bank’s 2016 report “Taking On Equality,” which observes that “both the extreme poverty headcount ratio and the total number of the extreme poor have steadily declined worldwide since 1990.”
The world had almost 1.1 billion fewer poor in 2013 than in 1990, a period in which the world population grew by almost 1.9 billion people. Overall, the global extreme poverty headcount ratio dropped steadily over this period. Despite more rapid demographic growth in poorer areas, the forceful trend in poverty reduction culminated with 114 million people lifting themselves out of extreme poverty in 2013 alone (in net terms).
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A complete solution is still far off and so more—much more—is necessary to alleviate suffering. The good news is that a degree of progress is conspicuous in recent decades, as the chart below illustrates. The question is why? What’s the source of this progress and how can the world generate more of it?
The answer is inextricably linked to economic growth, which is necessarily accompanied by greater inequality. There’s room for debate about how much inequality is too much and what can be done to alleviate its negative side effects. But on some level, more inequality is a good thing because it reflects the fact that some share of the population is becoming wealthier. And that’s the goal—expanding the pool of wealth.
There are other factors driving lower poverty rates, of course, ranging from increased spending on education, health, and social safety nets. But most if not all of the necessary funding drivers for programs that are designed to lift people out of poverty are also bound up with expanding economic activity.
The main source of poverty eradication is employment, and offering more and better jobs on a broad scale is everywhere and always a function of an economy that’s on the rise. The critical question, then, is how to promote and support growth? We can start by considering the conditions that appear to be associated with the progress over the last several decades.
It may be politically incorrect to point this out, but the decline in poverty rates since 1990 has been accompanied by a rise in globalization, lesser capital controls, a liberalized financial sector, and lower tax rates on higher incomes. Incidental? Unlikely. Meantime, the historical record on doing the exact opposite on those fronts doesn’t offer an encouraging profile as the basis for a poverty-eradication policy.
None of this means that the rise in economic inequality is irrelevant, or that policy makers should ignore the growing gap. But if you view the challenges of economic deprivation primarily if not wholly through the prism of inequality, and that lesser inequality is always good and a primary goal, there’s a risk of overlooking the mechanism and the means that’s been crucial in the progress for reducing poverty in recent decades.
Redistribution of wealth can play a role in alleviating poverty, of course, but it’s destined to play a minor and temporary role at best. The great lesson of history, over long stretches of time and during the past generation in particular, is that there’s no substitute for an expanding global economy for bringing more prosperity to a greater share of the population. The main focus should be on how to accelerate and deepen growth as a tool for furthering progress on poverty reduction.
To some extent, the historical record on what’s worked, and what hasn’t, should guide us. The World Bank’s “Taking On Equality” notes that “the substantial decline [in poverty since 1990] is mostly explained by the lower number of the extreme poor in two regions, East Asia and Pacific (71 million fewer poor) and South Asia (37 million fewer poor)….” A large portion of that success is due to China’s embrace of a market economy and India’s economic liberalization. Overall, “the world had almost 1.1 billion fewer poor in 2013 than in 1990, a period in which the world population grew by almost 1.9 billion people.”
It essential to recognize that inequality will rise whenever economic progress is present. That’s the nature of success on this front. It’s hardly an excuse for mindlessly promoting tax cuts as the only solution or assuming that fertile conditions for large corporations is the answer. Paring the poverty rate is destined to be a complicated affair going forward, in part because the low-hanging fruit has largely been picked, thanks to the previous shift to market-oriented economics from command economies in China and elsewhere.
But now what? There are no easy answers or simple solutions. But there are some clear lessons that deserve respect, including the recognition that wealth generation isn’t the enemy. The details on how wealth is created matter, of course. Nonetheless, if there’s no agreement on the big-picture theme that has been instrumental in poverty reduction over the last several decades, the essential task of keeping the trend alive will be even tougher than we think.
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