Well, that’s quite a lot of the topics that you haven’t had yet this morning.
It’s always a pleasure to come here to Lindau.
Because we see a lot of fresh faces every time.
Good.
I’ve been interested in development issues for a very long time.
What I’m going to be doing today is making some quite small points in a way
but they’re small points about very important issues that have to do with reducing poverty.
And it was suggested to me by, it’s a kind of reaction to things that I’ve seen in the press and,
and heard in general conversation, let’s just start to make sure that you’re, you understand what’s going on here.
Of course poverty is one of those words that is really incredibly vague, indefinable.
Possibly you think this is some kind of idea of what is the least you need in order to live satisfactorily at all.
But of course, if you actually try to calculate the cost of the necessary food to keep alive
with a decent expectation of health, then that is incredibly cheap.
Really one has to include a lot of things besides basic food but you saw food in the title of the talk,
so of course I’m thinking of food particularly,
but if we’re going to get any kind of measurement of somebody’s standard of living and relate it to a notion of poverty,
we’d better measure real consumption in some sense and it,
the better include things like education, health care and other very important publically provided infrastructure.
Even then of course it’s still crude, you can’t really capture this in a single dimensional number.
But having got there, I wonder what we should do about this inequality of consumption,
which of course is revealed as soon as you start getting measures of this kind, and that’s really the topic of this talk.
I’m going to be reacting a bit to what is the standard way of presenting the poverty,
which is to concentrate very much on the crudest possible description of the inequality of consumption
that we know exists by showing poverty head counts.
Poverty head counts of course are simply the number of people below some almost arbitrarily chosen number for real consumption.
And quite often when you see poverty head counts, they’re based on surveys that have estimated income,
and they may not even be income per capita, and if they’re consumption,
they might not be consumption per capita but consumption per household,
and it can sometimes be a little tricky to track down which.
But I don’t want to use alternative kinds of measures like gini coefficients
because they pay just as much attention to what is going on
in the upper part of the income distribution or consumption distribution as in the lower, hence I concentrate on that.
And this is where we had got to.
You may well wonder or you may well conjecture that the reason why this stops in 2005
is because I was too lazy to bring it up to date.
But actually if you get onto the World Bank figures on the web, you will find that,
2005 is the last year when you have very many fairly well established figures for a decent number of countries.
Of course you can get later figures, particularly for your higher income countries
and a few scattered figures, 2006, 2007, but the standard measure is what we’ve got here
and I dare say we’ll quite soon get some later figures.
Though I remind you of the dramatic feature of economic history,
that the number of people living below a fixed real poverty line of a dollar twenty five a day
has gone down very substantially in this period of fifteen years and it’s been going down more rapidly in the more recent period.
And of course you can see from this diagram, this graph, that that’s largely what happened in Asia and East Asia,
which is to say that China made a very large contribution to this.
And I just remind you that through this period world population was growing at slightly over one percent a year,
or a bit more than that, so it actually is a proportion.
Poverty has been going down quite well, but there’s what happened in China which has been the really dramatic effect.
So I’m going to start by saying a little bit about why I think or how I think China managed to achieve,
if it is an achievement, because maybe it just happened rather than was planned as such, to do something quite this dramatic.
I don’t know that anybody particularly believes in the 1980 figure which, this tremendously high proportion below that.
Because certainly at that time China was using a poverty level way below a dollar twenty five a day
for its own official measures, and the surveys were perhaps not terribly well conducted then,
but in the more recent twenty years, I don’t think there’s much question that they’ve been fairly well done.
And it makes it look as though there isn’t any poverty probably in China now, if you could properly project this curve forward.
Now, I know, when I suggested to the Department of Chinese Government, informally over coffee, that looking at this graph,
it appeared they should close down the office, that they immediately said there’s a lot of poverty in China,
so I don’t know whether you regard that as clear evidence.
But what I want to do is to talk a little bit now about how China reduced it.
At least this is what I think.
First thing to say is this is not only by official figures,
it seems to be pretty much verified by the very careful consumer surveys that are being done,
that poverty in this sense is mainly rural.
Of course there are some poor people in cities, but numerically it appears not to be a very large figure.
So therefore, what we have to consider is what has happened there.
Now, the Chinese strategy for economic growth was quite deliberately to industrialise and to encourage urban expansion
to get into export growth, which was expected to be largely exports of urban produced goods.
And that has pretty much been what has happened.
And you might therefore think that, if indeed poverty declined, and that means that rural poverty declined tremendously,
though this just happened and there wasn’t particularly an outcome of that strategy.
But of course there was migration into industry.
I put it this way, into industry in urban areas.
I put it this way because there was quite a lot of industry in towns and even villages,
not so important nowadays but in the eighties that would have been quite important.
Quite a lot of people therefore were drawn into industry
and when in industry they were paid a wage that was above the poverty line, so clearly this makes some contribution.
But it wouldn’t be unrealistic to say that the typical example is of somebody living in a rural area
which is perhaps rather above the average standard of living.
There is a great deal of inequality between villages, if I can put it that way,
for reasons that I will come to in a couple of lines.
And of course it’s the people in the better off villages who actually are more likely to be able to work well in the cities,
and they’re more likely to migrate, and can afford the costs that are associated with migration,
migration which is often temporary for a number of years rather than completely permanent.
So what you’re seeing is people being lifted from an income level
which may already be above the poverty line to an income level
that is typically about three times the income that they have been receiving in rural areas.
The one way of looking at that is to say that’s a really pretty expensive way of reducing poverty,
of course there are some reasons for that, some good, some not so good.
Another contribution that we made to reducing poverty is the one child policy,
which has meant that population has grown rather more slowly in China than it otherwise would have.
The population is still growing, it is expected to peak in about ten years,
and even if the one child policy were now greatly weakened, that would still be true.
Of course that means that if output is not too sensitive to the number of people in rural areas, not actually producing,
that you’d expect income per head in rural areas to be a bit higher as a result of that,
and rough calculations confirm that that’s pretty much true.
What one might expect, and what I had naively thought before I looked into things properly,
was that this very special feature of China might be a major reason why poverty is now quite low,
namely that the use of land is distributed equally to people in the village, men, rather.
Now that, that statement covers a variety of ways of doing it
and there is still cases of common land being used in common and things like that.
But broadly that’s right, so that unlike many countries, many poor countries,
you don’t have land ownership in the hands of land owners who are quite rich for example.
Another way of putting it is to say that the income of people in agriculture in rural areas in China
is made up of an implicit wage and also implicit rent, because they don’t have to pay any rent for the land they get the use of.
In theory they don’t own the land, they’re not allowed to borrow on it as security.
Sometimes what is effectively selling of land takes place but that, that’s irrelevant to the point that I’m making now,
that at least one of the major reasons why you’d expect considerable inequality in rural incomes, is simply not present in China.
On the other hand, as I remarked before, as between villages you get very great differences,
and because of what’s called the Hukou system, a registration system for where people live,
people cannot easily move from village to village, in fact I’m told by some people that it just can’t happen.
And therefore you don’t get equalisation between villages and provinces,
and that in itself is clearly a major reason for continuing inequality.
However, the reason why I say and I put the question mark here and say land distribution is what’s doing it,
is that the land had been redistributed long before the beginning of what’s called the reform period,
which is the period that I’m really looking at
and the period that these inequality and poverty figures refer to, starting in 1978 or 1979.
So that you wouldn’t expect any change in the poverty levels to be associated with this, relatively satisfactory land distribution.
But it seems to me, and looking into it, that it comes down to agricultural growth in China.
Now, as you’d probably guess by now, at least, I think the proportion of people living in rural areas,
working in agriculture or the proportion of working hours in agriculture is probably less than a half.
So that one shouldn’t think of incomes in rural areas as being entirely generated by agriculture,
indeed incomes as such are only a part of the total incomes.
But many of the other incomes, the services associated with it, services of distribution,
of carting things by lorry from one place to another, all of the usual services that grow up as people get richer,
are based on agriculture in some fundamental sense.
The real source of agriculture, of growth, you can see like this.
This is my calculation of agricultural value added in China.
It happens not to be per capita, but the number of people working in agriculture had not been growing very fast
and has now been declining for some years,
so this gives you a pretty good indication of incomes per head in agriculture as well as elsewhere.
And of course, as the income per head goes up in agriculture, so the wage for other activities in rural areas goes up as well.
So this then gets into the general incomes in rural areas.
Now, this pretty impressive growth rate, it’s nearly quadrupled in the thirty years that this picture refers to,
but that’s nothing compared to the growth rate of the economy as a whole as measured by GDP or even GDP per head.
So I must say, I think that this probably gives a better indication of the growth of people’s enjoyment of life,
of standard of living than the headline growth figures that we hear of so frequently.
Now there’s probably a more realistic one, it’s, if I remember right it’s around five percent a year.
And in many ways that’s what it takes to get so many people out of poverty, because the distribution of income around this,
the average that’s implied by the diagram is of course quite dispersed
but the whole distribution moves upwards over time like this, and of course the number of people in the lower tail,
below the dollar twenty five a day, which started off as a very high proportion.
It then falls and by the way you can see that, we’ve really got it here.
This fairly rapid growth and the average towards the end may well have to do
with the way the distribution is moving up and the lower tail no longer matters so much.
So my notion is that really quite a lot of the reduction in poverty can be put down to that and how did that come about?
When you look at the various inputs into agriculture,
and labour and input not been increasing, irrigation, irrigated land had gone up by about fifty percent in this period
and fertiliser use had rocketed up and it looks very clear that this is the green revolution at work.
The coming of the new varieties which was, even began in the early sixties, late fifties
but really exploded in China in this period and allowed crops to use very large quantities of chemical fertilisers
which of course are industrial products.
So it’s very important that they were available and there were fertiliser subsidies
that encouraged the use of land and there were considerable improvements and transportation facilities
which meant that cash crops could be more useful and get a better price.
So all of these things were there encouraging this growth, the availability of the fertilisers,
which was possible because of the - it was actually because of export earnings by industry initially
and later by the actual production of them.
Now, that’s one way of looking at the importance of agriculture in the reduction of poverty
and you notice that it’s just a simple straightforward view of it as generating income.
And that’s not how most non economists at least tend to think about this.
They think to deal with poverty the important thing is the production of food.
Recently we’d had an FAO statement which I got off the web,
by mid 2008 international food prices had sky rocketed to their highest level in thirty years.
This, coupled with the global economic downturn, pushed millions more people into poverty and hunger.
Now of course they don’t say how much of that is supposed to be the result of the global economic downturn,
but this is FAO, so they really mean that it was mainly the rise in prices that did that.
They’re quite explicit after this bit I’ve quoted in saying that their view of the problem with food prices
was influenced by reports from countries who were asked to each estimate
how much they thought their poverty would have changed as a result,
and they’re mainly stories of riots which I draw your attention to the fact that they were urban.
The point about them being urban is of course that workers in the cities certainly
are made worse off by rising prices if they’re not compensated by higher wages, a higher price of food.
But that’s not true of people who are net producers of food.
So I’d advise some scepticism to this and I want to explore it a little further.
Higher prices for food might well have brought millions out of poverty.
If you have a very small farm and you’re struggling and have to sell some of the food,
in order to pay for the other necessities of life, then higher prices for food grains are just what you want
and we should bear in mind that that may well be important.
And I think there is no question in that in China that it was very important
because in the most recent years you have high value added because of higher prices.
Just what happened to prices, well I hope that’s reasonably visible.
Indeed you should read right from the bottom of the blue of the background of the graph because that’s roughly at zero level.
It’s actually, it’s slightly positive but even allowing that the diagram might be a little misleading, that they were big jumps.
I’m happy to be able to say that in 2008, just when the prices had gone up like mad,
I was giving a lecture and I said I’m sure they will come down.
You should not regard this as a new inflation in prices,
and they did but I didn’t realise that they were going to jump up again and they have done that.
Although more recently you can see on the left hand graph here that literally now we’ve gone high again,
they came down a bit through 2010 and now they are, in the most recent figures from the FAO, they’re at their highest level.
And I want you to compare that with what you see on the right hand graph, if you can see that at all clearly.
The things I’m interested in here, now the green line and the orange line.
The orange line is production, the best estimate one can get, and it does fluctuate rather a lot.
I’d just emphasise that the horizontal axis is at 1800,
so we’re not measuring up from 0 of course and the top level there is 2300.
Now, this is of course quite a considerable growth.
But if you look at utilisation, which is the actual use
and the reason why the two are different is of course that you get inventory, the stocks change,
that the green curve, the line, is remarkably smooth, so you’re getting considerable fluctuations in prices as reported,
while you’re getting a fairly smooth change in actual demand as it comes up.
What I’d of course very strongly suggest is that in the food market there is a great deal of sensitivity of prices
to relatively small changes in the balance between demand and supply.
Although strangely for a very long period food prices remained remarkably stable, food grain prices at least,
and I don’t quite know why that should have been true when more recently they’ve started to go tumbling around,
speculation may have had something to do with it, but it doesn’t show up all that clearly in the stock figures that we have here.
That’s background to how important is food in all of this,
and the lesson I was drawing there was the sensitivity of food prices to small changes.
And hark that back to make, pointing out that there’s at least a belief that these changes in food prices
could have a rather big impact on poverty so that it might –
that doesn’t necessarily mean we can do anything about the whole thing, but that we may want to pay attention to that.
And one of the things that we might draw from this is
that the China story may not be something to be applied to the rest of the world very much.
That’s to say that we shouldn’t necessarily expect that somehow poverty can be put right by relying on the agricultural sector.
Particularly in Africa that might not be the way,
and certainly Africa’s been having most of the time rather a bad time in agriculture.
What’s the alternative?
The classic way of dealing with poverty or low incomes or inequality is transfers.
You might reasonably have guessed that whatever topic I’d take and I’d come round to taxes and subsidies sooner or later
and it seems to me to make a great deal of sense in the area of poverty.
So I want to explore just what the chances are of doing a good job of reducing poverty by transfers.
Now, these are already used, cash transfers are used in Latin America, Mexico and Brazil, at least.
And India has rather equivalent things like employment schemes and free school meals,
so these would count and it’s considering other possibilities.
There are also things like the World Food Programme, which distributes food to particularly needy areas,
not simply on an emergency basis because for example East Timor
has had a steady flow of food from the World Food Programme for quite a number of years,
and it’s simply an important part of their income in effect.
So transfers can certainly be used.
How good do they work?
Well, there isn’t a lot of time to do this.
It’s a bit difficult to find out quite what the demand for function for food is,
but we really need to have it in order to do a good assessment.
So I’ll skip over this fairly quickly but, as you could understand, even although prices fluctuate quite a bit,
it’s difficult that for long periods they really haven’t done so much and therefore it’s been hard to get to the price response.
I think most people guess at the demand function,
that treats the demand for food as a function out of income divided by food price,
and that actually fits pretty well to data but not if it’s a linear function.
Deaton and Subramaniam found that elasticity, demand was falling and within the range they were looking at for,
I think it was Maharashtra, it got down to 0.4 and for higher incomes I’m sure it’s much less than that and presumably one at 0.
Now, this is all important because it means that low income people are going to change their purchase of food
much more as price changes or income changes than high income people.
And the question is, what does that imply?
Well, look at what happens if you said about redistributing from, say a bunch of rich people
in order to pay poor people, modelling this, so the supply of goods is fixed, it’s convenient.
You’ve got to do something that will reduce the demand for food by the rich
because otherwise there won’t be extra food for the poor to have,
and the only way that the poor’s standard of living can increase is if there is quite a lot of food, at least at the very bottom.
It turns out with the kind of demand function I was describing, that the price of food will rise if you do this.
And in fact it can rise quite a lot.
Now you may say, mm, no, that would only be true if you had an enclosed food market within the country.
Don’t countries trade with one another?
Well, much less than you’d expect actually.
Of course the richer countries do quite a lot of trade in food grains,
but one of the reasons for these fluctuations in food grain prices
is because of the countries that greatly restrict trade, international trade.
So the internal price is probably quite important in practice.
And there are several conclusions I want to get from this.
One is that a successful transfer system is going to be associated with a rise in food price, food grain, food prices.
That doesn’t exactly mean that if you see food prices have gone up you should applaud, but it suggests that that may be important.
Second point, however, is that many of the poor may not be food producers at all
and they may indeed suffer quite a lot from the consequential rise in food prices,
so it’s necessary that the transfer they’ll receive, the amount of income paid to them,
is big enough to more than compensate for the effects of the rising price.
It doesn’t apply to food grain producing farmers but in another way it doesn’t,
we don’t apply that to the landlords who may do very well from a higher food price, but they have to be taxed.
And there is another issue that comes back to these urban riots which is of course,
if indeed the process would necessarily mean a rise in prices,
then you should think about the impact on others besides those that you’re particularly focused on
in creating the transfer system.
I suggest that the sensible way of doing this is that the transfer system should compensate the middle income,
middle to lower income people, I’m thinking of them essentially as the urban wage earners
so that they’re not worse off and so that they don’t start rioting in complaint.
Of course that means that you’re going to have to take more from the rich
in order to achieve any particular improvement of poverty at the lower end,
but what I’m after here is that it’s actually quite important to design these transfer systems
and paying attention to other people in the population, besides those that you think of as being particularly targeted by it.
And the last point would be, if you accept that for poor people who are not food producers,
that you want an increase in income and that must at least cover a cost that arises from the increased price of food,
then a good delivery control matters, because if a lot of that were to evaporate through corruption and fraud,
then you very quickly find that the net, there was a net loss for many of the poor people, rather than a net gain.
And I think that’s a concern in practically every country.
Thank you very much.
(Applause).