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Prosperity 246How to make poverty history? 

From a talk by Dr Lant Pritchett

Dr Lant Pritchett is a development economist, has worked with the World Bank, was a Professor at the Harvard Kennedy School and is affiliated with Oxford’s Blavatnik School of Government. He has published over a hundred books, journal articles, working papers with over fifty different co-authors. Here is some thought-provoking excerpts from a recent talk that he gave in Oxford:

We need to get rid of some intellectual weeds, some totally wrong ideas:

  1. The idea of a poverty line.
  2. The main cause of poverty is something about people and their characteristics or their decisions
  3. The idea that we can reduce poverty by focusing on poor people.
  4. That targeted programmes, either that are redistributive or targeted to augment the productivity of the poor, are key to poverty reduction.

Once we can get rid of those intellectual weeds, we can make some plans. Creating prosperity is what we should be doing because creating prosperity actually eliminates poverty automatically. If you create prosperity, you get rid of poverty anyway. Widespread poverty is not the result of poor people. It's the result of people being trapped in poor places. You need to focus on the productivity of the place people are in. Prosperity is created by including people in the productive economies and organisations. Not by isolating out people to target them, but rather by thinking we need to make them productive and include people into the productive economy, which means you need a productive economy first. If you don't have a productive economy, there's nothing to be included into.

Going back to the weeds, firstly, If you draw a line through income distribution and say a person below this line is poor and a person above this line is not poor, you've already created a massive intellectual mistake. There is no line in the income space that separates out a group of people called poor from a group of people called non-poor. If a person in extreme poverty earning under $1.25 per day, there is no celebration party when they cross the line and earn $1.26 per day and are non-poor!

Secondly, it's not who you are, it's where you are. The idea that somehow people are poor because they're poor people, they have intrinsically low productivity, is just fundamentally not true. People mostly have low income because they work in a low productivity place, which means trying to raise the income of a specific individual without changing the productivity of their place is a very low return exercise.

Recently, there was a gold-standard study that examined anti-poverty programmes. What they found is that if you spent $4,500 on the programme in a developing country over two years, you generated $344 in additional household income in the third year. Whereas, if you just take a low skill worker from one of the countries in which they implemented that programme, and you move that same person from the place they are and let them work in the United States, their income would go up $13,000 a year. Why? Because their intrinsic productivity isn't low, they' were working in a low productivity place. Focusing on attempting to remediate the poverty problem by focusing on the incomes of the people who are poor without considering the productivity of the place is a losing game. People fundamentally are poor because they're working in a low productivity environment. Just letting them work in a high productivity place illustrates orders of magnitude bigger impacts.

Let's look at Vietnam. 80% of the population used to be below the extreme poverty line. Now, it's essentially hit a level so low it's almost impossible to measure. Why? Not because the Vietnamese poor had programmes. It's not because the Vietnamese poor didn't make decisions differently. Not because anybody sat around and did behavioural programmes and nudged the poor. Not because of anything other than Vietnam fundamentally transformed the productivity of the country by adopting policies that allowed it to get more and more productive. That completely eliminated poverty within our lifetime. Under a microscope, we have reliable household surveys over this entire period. No question about the numbers. No question about the reality. Poverty disappeared completely without any fundamental transformation in the people. It was a transformation in the productivity of the place.

I was involved in a very large mixed quantitative and qualitative study of moving out of poverty around the world. Our study was based on people who were identified from ten years ago who had been poor and then we went back and sampled the people that their neighbours and fellow villagers had identified as moving out of poverty. We asked them their own narrative, their own story. How did they say they moved out of poverty? 71% named economic transformation related causes - "I got a new job. I started a new business. I added a new activity. I had this source of income. Hard work.". Only 0.3% named NGO activities - slightly higher than winning lottery or criminal activities (0.1%). So most of what you would hear about poverty initiatives are making no difference in the lives of anyone. They're so small and so relatively ineffective because it's really hard to change it if you don't change the country circumstance. If you change the country circumstances, you solve poverty.

Target programmes at best mitigate consequences of lack of inclusive productivity rather than actually reduce poverty. Most poverty programmes are mitigatory. They mitigate the consequences of the lack of prosperity, but can't really in any sense compensate for it.

Therefore, the question is how does one create environments, country environments, regional environments in which you can create prosperity? The design of poverty programmes and design of specific interventions becomes completely second order.

Here's a hard to understand answer. Productivity is a structural transformation that links together more and more diverse arrays of private and productive capabilities - it results in complexity. So instead of thinking I produce more when I have more, I produce more when I have a broader diverse array of capabilities rather than producing more primarily through accumulation.

To make it easier to understand, take the example of a symphony orchestra. A symphony orchestra can produce a wide array of music because it has a wide array of musicians. It's not that they have 56 great flautists. They have people playing a whole variety of instruments that constitute a symphony and with that variety of instruments, they can play the entire variety of the repertoire of music. Whereas having 12 of the best flautists in the world leaves you with the ability to play music written for the flute, full stop. It's not the accumulation of more. It's the expansion and the array of capabilities, so having individuals with capabilities across an array of things, that is the key to productivity.

The way people get productive is they get linked into a complex productions chain with their skill set being one of a large dimensional set of skill sets. It's not having more of a given thing. It's being in a place where you can link your skill sets with lots of other skill sets.

If you look at countries around the world, you see that what rich, high productivity places either across or within countries do is they actually produce lots of different products and they produce the products that few other places produce. Whereas places that are poor produce few things and they produce things that everybody else is able to produce. What characterises rich countries is their ability to produce a very large number of not very common products. What characterises poor countries like Malawi is that they produce very few products and the products they do produce are produced by everyone else. It's very hard to become highly productive and prosperous if you're producing what anybody in the world can produce because obviously you're pinned down in what you can sell it for because everyone else can do it too.

Another example re supplying a grocery store. Is the key to prosperity making more bread versus being able to make everything in the grocery store? Make more bread, you've got one product. You've got a decent recipe and it's known and to produce more bread you need a few more known inputs. Then you would think that countries who are rich are those that produce more bread. This is the accumulations model. Whereas the complexity model is that in order to make different foods, I need different recipes. The recipes are often complex, meaning they involve lots of ingredients and they involve knowing how to combine the ingredients in complex ways that other people don't have, hence being rich is the capability to produce everything in the grocery store. You have to have an array of capabilities, which are the elements that go into the recipes, and you have to master the how to of being able to assemble those complex things.

Now, how does a country do that?

1. Promote the expansion of public and private capabilities which, in turn, allow the production of more and more complex products (not 'more of the same') through the pull forces of innovation.
2. Link people to that productivity through infrastructure and fair playing fields.

Sounds simple but it is hard to inititiate and sustain politically as existing sources of economic and political power tend to favour 'stagnant exclusion' to maintain their power rather than risk economic dynamism which threatens them.

So we can see the basis of good industrial strategy - education, diversity of business, research and development, innovation, infrastructure - transport and broadband, mobility,  diversity of workforce, inclusion specialist businesses, investment in technology, etc.

We can also see that individuals have a huge part to play - by constantly learning and retraining, being mobile, being innovative, creative. With a world of knowledge at your fingertips through the internet and God-given ideas, how can you create prosperity for all?

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From a talk by Dr Lant Pritchett, 30/07/2019

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