THE END OF POVERTY
HOW WE CAN MAKE IT HAPPEN IN OUR LIFE TIME
JEFFREY SACHS
PENGUIN BOOKS 2005
PART XI
Chapter 13: Making the Investments Needed to End Poverty
At the most basic level, the key to ending extreme poverty is to enable the poorest of the poor to get their foot on the ladder of development. The development ladder hovers overhead, and the poorest of the poor are stuck beneath it. They lack the minimum amount of capital necessary to get a foothold, and therefore need a boost up to the first rung. The extreme poor lack six major kinds of capital:
- Human capital: health, nutrition, and skills needed for each person to be economically productive
- Business capital: the machinery, facilities, motorized transport used in agriculture, industry, and services
- Infrastructure: roads, power, water and sanitation, airports and seaports, and telecommunications systems, that are critical inputs into business productivity
- Natural capital: arable land, healthy soils, biodiversity, and well-functioning ecosystems that provide the environmental services needed by human society
- Public institutional capital: the commercial law, judicial systems, government services and policing that underpin the peaceful and prosperous division of labor
- Knowledge capital: the scientific and technological know-how that raises productivity in business output and the promotion of physical and natural capital
How to overcome a poverty trap? The poor start with a very low level of capital per person, and then find themselves trapped in poverty because the ratio of capital per person actually falls from generation to generation. The amount of capital per person declines when the population is growing faster than capital is being accumulated. Capital is accumulated, in turn, in a balance of two forces, one positive and one negative. On the positive side is the capital accumulated when households save a part of their current income, or have a part of their income taxed to finance investments by the government. Household savings are either lent to business (often through financial intermediaries such as banks) or invested directly in family businesses or equities traded in the market. Capital is diminished, or depreciated, as the result of the passage of time, or wear and tear, or the death of skilled workers, for example, because of AIDS. If savings exceed depreciation, there is positive net capital accumulation. If savings are less than depreciation, the capital stock declines. Even if there is positive net capital accumulation, the question for growth in per capita income is whether the net capital accumulation is large enough to keep up with population growth.
HOW THE POVERTY TRAP WORKS AND HOW FOREIGN AID HELPS TO OVERCOME IT
Figure 1 shows the basic mechanics of saving, capital accumulation, and growth, and figure 2 shows how a poverty trap works.
- In a “normal” economy, things proceed smoothly toward rising incomes, as household savings and government investments are able to keep ahead of depreciation and population growth.
In figure 2, the process breaks down into a poverty trap. With a household that is impoverished, all of its income goes to consumption, just to stay alive. There are no taxes or personal savings. Nonetheless, depreciation and population growth continue relentlessly. The result is a fall in capital per person and a negative growth rate of per capita income. That leads to still further impoverishment of the household in the future. The figure depicts a vicious circle of falling incomes, zero savings and public investment, and falling capital per person as a result.
The solution is shown in figure 3, where foreign help, in the form of official development assistance (ODA), helps to jump-start the process of capital accumulation, economic growth, and rising household incomes. The foreign aid feeds into three channels. A little bit goes directly to households, mainly for humanitarian emergencies such as food aid in the midst of a drought. Much more goes directly to the budget to finance public investments, and some is also directed toward private businesses (for example, farmers) through microfinance programs and other schemes in which external assistance directly finances private small business and farm improvements. If the foreign assistance is substantial enough, and lasts long enough, the capital stock rises sufficiently to lift households above subsistence. At that point, the poverty trap is broken, and figure 1 comes into its own. Growth becomes self-sustaining through household savings and public investments supported by taxation of households. In this sense, foreign assistance is not a welfare handout, but is actually an investment that breaks the poverty trap once and for all.
A numerical illustration
Differential diagnosis and capital accumulation
Why good investments come in packages
One of the weaknesses of development thinking is the relentless drive for a magic bullet, the one decisive investment that will turn the tide. Alas, it does not exist. Each one of the six identified types of capital is needed for an effective, well-functioning economy. Each one is needed to escape the poverty trap. Even more to the point, success in any single area, whether in health, or education, or farm productivity, depends on investments across the board.
Let me focus on child survival to make the point…..
Investing in technological capacity
EXAMPLES OF SCALING UP IN THE FIGHT AGAINST POVERTY
The world is filled with pilot projects showing that one intervention or another has proven successful time and again. It has been shown repeatedly that antimalarial bed nets save lives in rural Africa, that anti-AIDS drugs can be administered in low-income settings, and that immunizations can be delivered in the most difficult places in the world, even in the middle of war zones. The main challenge now is not to show what works in a single village or district – though these lessons can be of great importance when novel approaches are demonstrated – but rather to scale up what works to encompass a whole country and even the world.
There are several significant examples of programs that have been scaled up massively to remarkable success. Here are 10 dramatic examples that prove the naysayers wrong:
The Green Revolution in Asia
The Green Revolution is one of the most important triumphs of targeted science in the past century. Fearing the possibility of massive hunger because of a rapidly rising global population, the Rockefeller Foundation took the initiative in developing and promoting high-yield varieties (HYVs) of staple crops, first in Mexico, and then in Asia and more broadly elsewhere. The start was in 1944, when the Rockefeller Foundation set up an institute to develop HYVs of wheat for Mexico, under the lead of Dr. Norman Borlaug. Scientific breeding, using crosses of strains brought from Japan after World War II, led to a breakthrough. Mexico went from a large net importer of grain to a significant net exporter between 1944 and 1964. Borlaug then persuaded donors to invest in similar crop-breeding efforts for South Asia, and also helped to introduce the resulting technologies to local crop breeders who successfully developed new strains. As the result of its Green Revolution, India went from 11 million metric tons of wheat production in 1960 to 24 million tons in 1970, 36 million tons in 1980, and 55 million tons in 1990, far outstripping the increase in population. High-yield varieties were similarly developed for other crops and locations through a network of international institutions, such as the International Rice Research Institute in the Philippines and the International Potato Center in Peru.
The eradication of smallpox
The Campaign for Child Survival
The Global Alliance for Vaccines and Immunization
The Campaign Against Malaria
The Control of African River Blindness
The eradication of Polio
The spread of family planning
Export processing zones in East Asia
The mobile phone revolution in Bangladesh
These cases demonstrate some common themes. First and foremost, scaling up is possible when it is backed by appropriate and widely applicable technology, organizational leadership, and appropriate financing. In many cases – such as smallpox or polio eradication – the technologies had long existed, but had not been applied in the poorest settings. In other cases, such as with the high-yield varieties of food crops at the core of the Green Revolution, the appropriate technologies had to be developed and then promoted through a targeted effort. In almost every case, technologies had to be adapted to local conditions (for example, solving the problems in tropical settings of maintaining the “cold chain” for immunizations that must remain cold until used, or adapting crop-breeding technologies to the local conditions of land, climate, and labor).
In the case of the Millennium Development Goals, the promising technologies exist, but have not yet been scaled up. Antimalarial bed nets, just to name one pertinent example, are used by fewer than 1% of rural Africans living in endemic malaria regions. It is time for that to change. Next, I consider the operational ways to get the job done.