Introduction Part 1: “What Is Poverty and Who Are the Poor? ” Introduction: “What Is Poverty and Who Are the Poor? ” People Living in “Extreme Poverty” World Bank 1,300,000,000 World Bank 2010 $1.25/day Economic Terminology • • • • Income Wealth GDP (Gross Domestic Product) Per capita GDP Why do we use GDP to measure poverty? Economic Terminology • Absolute Poverty – measured against a designated minimum threshold of material well-being. The incomes of the poor fall below the minimum threshold. – Current standard = $1/day PPP • Relative Poverty - identified by comparing levels of material well-being experienced by different individuals or groups, rather than by comparing the level of well-being to a standard. Poverty Can Be Measured by Either Output (GDP) or Consumption Consumption Measure of Number of Poor by World Region Regions 20005 2008 332 million 284 million 6 million 2 million Latin America and the Caribbean 48 million 37 million Middle East and North Africa 11 million 9 million South Asia 598 million 571 million Sub-Saharan Africa 395 million 386 million Total 1.39 billion 1.289 billion East Asia and the Pacific Eastern Europe and Central Asia Reduction in number of poor, 2005-2008: 101 million Sources: World Bank Poverty and Inequality http://www.worldbank.org/Data/Views/Reports/TableView.aspx (May 1,2012 Countries of the World; Low, Middle and High Income The number of extreme poor has declined by 500 million since 1981 Share of World Population in Poverty, 1820 – 1998 ($1/day) World BankDavid Dollar, Development Research Group, World Bank. “Capitalism, Globalization and Poverty.” unpublished paper, written for The Foundation for Teaching Economics, March, 2003, p. 27 Number of People Living on Less Than $1 Per Day, 1820 - 1998 1980 World BankDavid Dollar, Development Research Group, World Bank. “Capitalism, Globalization and Poverty.” unpublished paper, written for The Foundation for Teaching Economics, March, 2003, p. 27 World Bank 2009 • ..\..\..\Videos\RealPlayer Downloads\Hans Rosling's 200 Countries, 200 Years, 4 Minutes - The Joy of Stats - BBC Four.flv Introduction Part 2: “What Is Poverty and Who Are the Poor? ” ~1750 Years of Life Expectancy at Birth Select Years 1950-55 1975-80 2005-10 ~30 (1800) 66 74 81 ~36 (1799-1803) 69 73 79 India 25 (1901-11) 39 53 64 China 25-35 (1929-31) 41 65 73 38 48 51 46 60 67 Place Middle Ages France UK 20-30 Africa World 20-30 Sources: Lee and Feng (1999); Peterson (1995); Wrigley and Schofield (1981, 529); World Resources Institute (2011); UNDP (2002) http://hdr.undp.org/statistics/data/indic/indic_1_1_1.html Real Gross Domestic Product Per Capita (1990$ International PPP) Area 1000 1500 1700 1820 1952 Europe $400 ~$640 870 1,130 4,370 USA 600 1,260 10,650 23,380 27,948 India 530 530 610 1,570 1,957 540 3,200 3,583 1,220 1,489 5,190 6,049 China 450 600 600 600 Africa 400 400 400 400 World 420 550 600 670 2,270 Sources: Maddison (1998, 1999) Development Centre Studies The World Economy: Historical Statistics, Maddison, 2003. 1995 2001 13,950 19,256 Real Gross Domestic Product Per Capita (2005$ International PPP) 1995 2001 2007 2010 Europe $24,674 28,364 30,789 29,765 30, 455 USA 33,903 39,602 41,260 40,650 India 1,452 1,832 2,685 3,240 3,876 China 1,849 2,868 5,239 6,810 9,233 Africa 1,498 1,589 1,914 2,022 World 7,037 7,955 9,535 9,869 Sources: Maddison (1998, 1999) Development Centre Studies The World Economy: Historical Statistics, Maddison, 2003. *University of Pennsylvania 2012* 49,965 10,922 Africa Continues to Lag Behind: 1/3 of the world’s “extremely poor” What does recent research tell us about why Africa continues to lag behind – and what we can do about it? What does Capitalism have to do with Poverty? Overall Economic Freedom Index and the Top 10 Hong Kong Singapore New Zealand Switzerland Unit. Arab Em. Mauritius Finland Bahrain Canada Australia 0 2 Source: The Fraser Institute. 4 6 Score (out of 10) 8 10 Overall Economic Freedom Index and the Bottom Ten Algeria Congo, Dem. R. Burundi Central Afr. Rep. Angola Chad Zimbabwe Congo, Rep. Of Myanmar Venezuela 0 Source: The Fraser Institute. 2 4 6 Score (out of 10) 8 10 GDP Per Capita (ppp), 2010 Per Capita Income and Economic Freedom Quartile $40,000 $35,000 $30,000 $25,000 $20,000 $15,000 $10,000 $5,000 $0 Most Free Quartile 2nd Quartile 3rd Quartile Least Free Quartile Most Free ……………. Least Free Sources: The Fraser Institute; The World Bank, World Development Indicators, 2013 Growth in Developing Nations Per Capita and Economic Freedom Quartile Growth GDP per capita (average annual %), 19912011 % 4.0 3.5 3.0 2.5 2.0 1.5 1.0 0.5 0.0 Most Free Quartile 2nd Quartile 3rd Quartile Least Free Quartile Most Free ……………. Least Free Sources: The Fraser Institute; The World Bank, World Development Indicators, 2013. Growth GDP per capita (average annual %), 1991-2011 Income Share of the Poorest 10% and Economic Freedom 3.0% 2.5% 2.0% 1.5% 1.0% 0.5% 0.0% Most Free Quartile 2nd Quartile 3rd Quartile Least Free Quartile Most Free ……………. Least Free Sources: The Fraser Institute; The World Bank, World Development Indicators, 2013. Income of the Poorest 10% and Economic Freedom Income of the Lowest 10%, 2011 $12,000 $10,000 $8,000 $6,000 $4,000 $2,000 $0 Most Free Quartile 2nd Quartile 3rd Quartile Least Free Quartile Most Free ……………. Least Free Sources: The Fraser Institute; The World Bank, World Development Indicators, 2013. Economic Freedom and Political Rights (low scores indicate high level of rights) Political Rights (out of 7) 5.0 4.0 3.0 2.0 1.0 0.0 Most Free 2nd Quartile 3rd Quartile Quartile Most Free ……………. Least Least Free Quartile Free Sources: The Fraser Institute; Freedom House, Freedom in the World Country Ratings, 2011, available at http://www.freedomhouse.org/. Economic Freedom and Civil Rights Low scores indicate high level of rights 5.0 Civil Liberties (out of 7) 4.0 3.0 2.0 1.0 0.0 Most Free Quartile 2nd Quartile 3rd Quartile Least Free Quartile Most Free ……………. Least Free Sources: The Fraser Institute; Freedom House, Freedom in the World Country Ratings, 2011, available at http://www.freedomhouse.org/. Economic Freedom and Corruption Corruption Rating (out of 100) High scores indicate low corruption 100 90 80 70 60 50 40 30 20 10 0 Most Free Quartile 2nd Quartile 3rd Quartile Least Free Quartile Most Free ……………. Least Free Sources: The Fraser Institute; Transparency International, Corruption Perceptions Index, 2012 available at http://www.transparency.org. Life Satisfaction of of 10 Economic Freedom and Life Satisfaction 7.0 6.5 6.0 5.5 5.0 4.5 4.0 3.5 3.0 Most Free Quartile 2nd Quartile 3rd Quartile Least Free Quartile Most Free ……………. Least Free Sources: The Fraser Institute; Happy Planet Index 2012 Economic Growth improves the lives of the poor by making the pie bigger Bigger “slices” mean higher standards of living Reduced Poverty Since 2000: Research on Growth vs. Safety Net ? 1. 4/5 growth / 1/5 redistribution (Dollar, Kraay, Kleineberg study) • context matters: averages hide wide range of variation 2. economic growth is not generally associated with increased income inequality: • the (overall) share of income going to the poorest 2 quintiles (40%) does not change significantly with growth • poor governance often increases income inequality for specific populations in specific locations 3. 4/5 of the improvements in the lives of the poorest 40% of the population over the past decade are attributable to economic growth; 1/5 is attributable to redistribution Talking about “Is Capitalism Good for the Poor?” • distinguish between “poverty” v. “poor people” • distinguish between treating symptoms v. underlying causes Reduced Poverty Since 2000: Research on Growth vs. Safety Net ? 1. 75% growth / 25% redistribution (Dollar, Kraay, Kleineberg study) • context matters: averages hide wide range of variation safety net (redistribution) econ growth demographic comp. Africa Continues to Lag Behind: 1/3 of the world’s “extremely poor” What does recent research tell us about why Africa continues to lag behind – and what we can do about it? Classroom Activity – Lesson 1: “Defining Terms” “Capitalism” is identified by its characteristic institutions Institutions: the formal and informal “rules of the game” that shape incentives and outline expected and acceptable forms of behavior in social interaction. • • • • Private Property Rights Rule of law Open, competitive markets Entrepreneurship and innovation ECONOMIC ANALYSIS clearly present – the component is present in the economy with few exceptions generally present – the component is present in the economy, but with many or significant exceptions generally absent – the component is only present in the economy in some limited forms clearly absent – the component is almost entirely excluded from the economy not enough information Present ? markets private property rule of law entrepreneurship Evidence? United States •The judiciary functions independently and predictably although serious constitutional questions have arisen regarding the government mandated health insurance decision. •Corruption and cronyism is on the increase and is undermining the institutional integrity of the rule of law, resulting in an 86th percentile ranking in control of corruption and a corruption perception index of 7.1 (out of 10) by Transparency International and a decrease of 4 points in the heritage Foundation score to 71 from a previous 75 in 2010. •Property rights are guaranteed, although affected by increasing regulations, ranking the US 19th in the world, with a score of 85 out of 100 by the Heritage Fndn. Specific Situation: Apple Patent Victory Aug. 25, 2012 SAN JOSE, Calif.—Nine jurors delivered a sweeping victory to Apple Inc. in a high-stakes court battle against Samsung Electronics Co., awarding the Silicon Valley company $1.05 billion in damages and providing ammunition for more legal attacks on its mobile-device rivals. Jurors Friday found that Samsung infringed all but one of the seven patents at issue in the case—a patent covering the physical design of the iPad. They found all seven of Apple's patents valid—despite Samsung's attempts to have them thrown out. They also decided Apple didn't violate any of the five patents Samsung asserted in the case. ECONOMIC ANALYSIS clearly present – the component is present in the economy with few exceptions generally present – the component is present in the economy, but with many or significant exceptions generally absent – the component is only present in the economy in some limited forms clearly absent – the component is almost entirely excluded from the economy not enough information Present ? markets private property rule of law entrepreneurship Evidence? clearly present Prices and products determined in markets clearly present Patents upheld clearly present Courts act and decisions are enforced clearly present Millions of companies operate in every sector 2012 Country Scenario Updates Capitalism is best thought of not as “a system,” but as a continuum of institutional combinations . . . . More Less capitalist capitalist Capitalism is best thought of not as “a system,” but as a continuum of institutional combinations . . . . More Less capitalist capitalist Capitalism is best thought of not as “a system,” but as a continuum of institutional combinations . . . . More Less capitalist capitalist Some institutional forms confer benefits on the poor . . . and others do NOT. Heritage: www.heritage.org/index/ freetheworld.com – Index of Economic Freedom Ranking Criteria: • Size of government • Legal system & Property rts • Sound money • Freedom to trade internationally • Regulation Process: Identify quantifiable data that can be used to rank countries. Consider how these measures connect to the institutions we ranked in the “Will the Real Capitalism?” activity: 1. Size of Government A. Government consumption B. Transfers and subsidies C. Government enterprises and investment D. Top marginal tax rate (i) Top marginal income tax rate (ii) Top marginal income and payroll tax rate markets, entrepreneurship 2. Legal System and Property Rights A. Judicial independence B. Impartial courts C. Protection of property rights D. Military interference in rule of law and politics E. Integrity of the legal system F. Legal enforcement of contracts G. Regulatory restrictions on the sale of real property H. Reliability of police I. Business costs of crime rule of law, entrepreneurship, property rights 3. Sound Money A. Money growth B. Standard deviation of inflation C. Inflation: most recent year D. Freedom to own foreign currency bank accounts entrepreneurship 4. Freedom to Trade Internationally A. Tariffs (i) Revenue from trade taxes (% of trade sector) (ii) Mean tariff rate (iii) Standard deviation of tariff rates B. Regulatory trade barriers (i) Non-tariff trade barriers (ii) Compliance costs of importing and exporting C. Black-market exchange rates D. Controls of the movement of capital and people (i) Foreign ownership/investment restrictions (ii) Capital controls (iii) Freedom of foreigners to visit markets 5. Regulation A. Credit market regulations C. Business regulations (i) Ownership of banks (i) Administrative (ii) Private sector credit requirements (iii) Interest rate controls/ negative (ii) Bureaucracy costs real interest rates (iii) Starting a business B. Labor market regulations (iv) Extra payments/ (i) Hiring regulations and minimum bribes/favoritism wage (v) Licensing restrictions (ii) Hiring and firing regulations (vi) Cost of tax (iii) Centralized collective compliance bargaining (iv) Hours regulations (v) Mandated cost of worker dismissal Markets, entrepreneurship (vi) Conscription 10 9 8 Most Free: Hong Kong 8.97 7 Venezuela Russia Egypt India Israel Czech Republic Poland Uganda Malaysia Indonesia Belize Finland Canada Chile Jordan U.S. Ireland Peru Hong Kong Fraser Institute Index of Economic Freedom 2013 (Released Sept. 2013) 2011 data 6 Least Free: Venezuela 3.93 5 10 9 8 Most Free: Hong Kong 8.9 7 Venezuela Belize Russia India Egypt Malaysia Indonesia Poland Uganda Israel Czech Republic Canada Finland Chile Ireland U.S. Jordan Peru Hong Kong Fraser Institute Index of Economic Freedom 2012 (Released Sept. 2012) 2010 data 6 Least Free: Venezuela 4.07 5 2013 Rankings* (Out of 151) • • • • • • • • • • • • Hong Kong 1 Singapore 2 NZ 3 Switzerland 4 UAE 5 Mauritius 6 Finland 7 Bahrain 8 Canada 8 Australia 10 Chile 11 United Kingdom 12 Jordan 13 (42 in 2010, 62 2012) • U.S. 17 (3 in 2006) • Israel 49 (44 in 2007, 83 in 2011) • Poland 59 (88 in 1990, 44 in 2012) • Uganda 64 (67 in 2010, 51 in 2001, 113/113 in 1990) • Greece 85 • Kenya 87 • Mexico 94 (69 in 2010) • Russia 101 • Egypt 108 (from high of 46, 80 in 2010) • India 111 • China 123 (82 in 2010) • Iran 127 • Ethiopia 142 • Zimbabwe 149 • Myanmar 151 • Venezuela 152 * 2011 data 2012 Rankings* (Out of 144) • • • • • • • • • • • • • • • Hong Kong 1 Singapore 2 NZ 3 Switzerland 4 Australia 5 Canada 6 Bahrain 7 Mauritius 8 Finland 9 Chile 10 United Kingdom 12 Ireland 12 U.S. 18 (down from 3 in 2006) Japan 20 Poland 48 (88 in 1990) • Uganda 50 (67 in 2010, 51 in 2001, 113/113 in 1990) • Jordan 62 (42 in 2010) • Greece 81 • Mexico 91 (69 in 2010) • Egypt 99 (from high of 46, 80 in 2010) • Israel 52 (44 in 2007, 83 in 2011) • Russia 95 • China 107 (82 in 2010) • India 111 • Iran 111 • Zimbabwe 142 • Myanmar 143 • Venezuela 144 * 2010 data Africa Continues to Lag Behind: 1/3 of the world’s “extremely poor” What does recent research tell us about why Africa continues to lag behind – and what we can do about it? Reduced Poverty Since 2000: Research on Growth vs. Safety Net ? 1. 75% growth / 25% redistribution (Dollar, Kraay, Kleineberg study) • context matters: averages hide wide range of variation safety net (redistribution) econ growth demographic comp. Reduced Poverty Since 2000: Research on Growth vs. Safety Net ? 1. 75% growth / 25% redistribution (Dollar, Kraay, Kleineberg study) • context matters: averages hide wide range of variation 2. economic growth is not generally associated with increased income inequality: • the (overall) share of income going to the poorest 2 quintiles (40%) does not change significantly with growth • poor governance often increases income inequality for specific populations in specific locations 3. 4/5 of the improvements in the lives of the poorest 40% of the population over the past decade are attributable to economic growth; 1/5 is attributable to redistribution Talking about “Is Capitalism Good for the Poor?” • distinguish between “poverty” v. “poor people” • distinguish between treating symptoms v. underlying causes Growth GDP per capita (average annual %), 1991-2011 Income Share of the Poorest 10% and Economic Freedom 3.0% 2.5% 2.0% 1.5% 1.0% 0.5% 0.0% Most Free Quartile 2nd Quartile 3rd Quartile Least Free Quartile Most Free ……………. Least Free Sources: The Fraser Institute; The World Bank, World Development Indicators, 2013. Income of the Poorest 10% and Economic Freedom Income of the Lowest 10%, 2011 $12,000 $10,000 $8,000 $6,000 $4,000 $2,000 $0 Most Free Quartile 2nd Quartile 3rd Quartile Least Free Quartile Most Free ……………. Least Free Sources: The Fraser Institute; The World Bank, World Development Indicators, 2013. Growth in Developing Nations Per Capita and Economic Freedom Quartile Growth GDP per capita (average annual %), 19912011 % 4.0 3.5 3.0 2.5 2.0 1.5 1.0 0.5 0.0 Most Free Quartile 2nd Quartile 3rd Quartile Least Free Quartile Most Free ……………. Least Free Sources: The Fraser Institute; The World Bank, World Development Indicators, 2013. Institutions Associated with Economic Growth • • • • Private Property Rights Rule of law Open, competitive markets Entrepreneurship and innovation Focus of lessons 2-5 in “Is Capitalism Good for the Poor?” Proposal Selection Form XyZpDQ Proposer Identification Code __________________ Circle a proposal: 19/1 18/2 17/3 10/10 9/11 8/12 16/4 7/13 15/5 14/6 6/14 5/15 13/7 4/16 12/8 11/9 3/17 2/18 1/19 If the responder accepts this proposal, $$$$$ $$$$$ I will receive ________ and the responder will receive ________ . If the responder does not accept this proposal, both the responder and I will receive $0. XyZpDQ Proposer Identification Code __________________ Circle a proposal: 19/1 18/2 17/3 10/10 9/11 8/12 16/4 7/13 15/5 14/6 6/14 5/15 13/7 4/16 12/8 11/9 3/17 2/18 1/19 If the responder accepts this proposal, $$$$$ $$$$$ I will receive ________ and the responder will receive ________ . If the responder does not accept this proposal, both the responder and I will receive $0. ******************** 123LMNO Responder Identification Code _________________ If I accept the proposal circled above, $$$$$ $$$$$ I will receive ________ and the proposer will receive ________ If I reject this proposal , I will receive $0 and the proposer will receive $0. Circle either accept or reject below. ACCEPT REJECT What did the proposers offer? Why? How did they decide how much to offer? Which offers did responders accept? / reject? Why? How did responders decide whether to accept or reject an offer? A fundamental assumption of economics is that economic man is a rational decisionmaker who acts in his self-interest. Are the results of this activity consistent with this theory of homo economicus (economic man)? Why or Why not? Classroom Activity – Lesson 5: “Institutions That Promote Social Cooperation” Classroom Activity – Lesson 5: “Character Values and Capitalism” Experimental Economics - History • John Nash – 1994 Nobel Prize in Economics for his work in game theory • Game Theory – the study of interactions in which the results of one person’s choices depend not only on his own behavior, but also on the choices made by another person. • Vernon Smith – 2002 Nobel Prize in Economics for experimental economics, which builds on game theory. Purpose of Ultimatum Game Experiments “These experiments create an empirical challenge to what we call the selfishness axiom— the assumption that individuals seek to maximize their own material gains in these interactions and expect others to do the same.” (Joseph Henrich, Emory University – recently completed a 4-continent research project in which the Ultimatum Game was played in 15 indigenous societies) If individuals “seek to maximize their own material gains,” and assume that other people do, too, what will proposers do? Why? (explain their thinking) If individuals “seek to maximize their own material gains,” and assume that other people do, too, how will responders react to proposals? Why? Results of Large Numbers of Ultimatum Game Experiments*: • the modal (most common) split is 50% - 50% • the mean (average) split is about 60% - 40% • about 20% of low offers are rejected *Games conducted with college students in the U.S. and other developed countries. Students were paid to participate. Stake was the equivalent of $10 U.S. Results are considered to be “robust.” Conclusions: The results of ultimatum games are inconsistent with the model of economic man that predicts material self-interest (selfishness). Note, especially, the rejection rate. Proposed Explanations • “Other-regarding” behavior is one of our preferences – we gain satisfaction not only from our lives (as the homo economicus model predicts), but also from the lives of others. • Players demand fairness, and punish unfair behavior on the part of proposers. – Responders take into account not just the amount of money offered but also the percent of the total. Proposed Explanations (cont.) • More equal splits may be less the result of fearing punishment for being unfair than they are the result of individuals’ concern for their reputations – This is consistent with the results of experiments comparing the behavior of people in market and non-market economies. – (also consistent with Adam Smith’s observations) Conclusions based on continued research: • Behavior in none of the 15 less-developed societies was consistent with the selfishness axiom. • Individual differences do not explain ultimatum game outcomes – age, – gender, – socio-economic status, – risk-aversiveness, – size of the stake (up to 3 months income) However . . . Group Differences • in the routine degree of economic cooperation in everyday life and • in the degree to which markets are an integral part of society are significant in explaining experimental outcomes Thus, we return to institutions: 1. The way people play the ultimatum game reflects the way they interact in everyday life. 2. Splits are more equal in cultures where people commonly exchange products and labor in markets. 3. Markets are institutions through which societies develop distinctive patterns of interaction, which may be internalized and reflected in ultimatum game behavior. Food for Thought (or assessment) Suppose that someone argued that capitalism is not good for the poor because it makes people greedy and selfish and encourages them to ignore others and think only of themselves. How could you use the results of ultimatum game experiments to counter that argument? Classroom Activity – Lesson 2: “Property Rights and the Rule of Law” Property Rights ARE Human Rights People Not Property Property rights are the rights of human beings to freely use and transfer their possessions, including themselves. Property Rights: New in Human History Benefits to the Poor Under the rule of law, the poor can be secure in their property rights, which gives them the opportunity to use property to improve their well-being. part 2: How property rights encourage growth by providing incentives for the creation of capital. Capital – dead or alive? Property Rights benefit the poor by making owned capital secure and productive. Lesson 2: “Property Rights and the Rule of Law” Property Rights and Growth • Property Right holders have an incentive to preserve their property. • Owners consider the future. • Owners more likely to improve property – because they retain the value of the improvements Investment • Secure property rights make investment more likely. • Property Rights allow people to obtain debt. – Use of past and future incomes. – Collateralization is of greatest benefit to the poor. Greater Security = Greater Productivity • Property rights benefit the poor more than the rich (who can defend their own property rights) – definition and enforcement of Property Rights gives the poor the same rights enjoyed by the rich. • Secure property rights contribute to economic growth by enabling the poor to shift effort from protective to productive activities. Secure Property Rights • Defined • Defensible • Divestible India’s Dalits: “Untouchable” Informal restrictions on property rights Defined but not Enforced • A right that is defined but not enforced is useless. Property Rights . . . AND the Rule of Law Securing Property Rights • Rule of physical force (anarchy) • Rule of men • Rule of law Rule of Physical Force Characteristics of Property Rights Under Anarchy Defined Seldom and then not clearly Defended Only for those with the physical force to do so or the money to pay someone else Peaceful transfer uncommon – even through inheritance Peaceful divestiture Rule of Man Characteristics of Property Rights Under Rule of Man Defined Defended Peaceful divestiture Sometimes – but often irrelevant or ignored Only for those who have the favor of those in charge Subject to the wishes of those in power Formal laws may exist, but enforcement is subject to the whim of those in power Rule of Law Characteristics of Property Rights Under Rule of Law: Definition clear Defendable Yes – both publicly and privately Divestible Peaceful transfer routine Both the governed and the governors are subject to the law. Big Picture • Rights to property promote economic growth by encouraging preservation, improvement and investment in owned resources. • In societies without clearly defined property rights the poor are disadvantaged because they lack the resources to enforce their rights. • To effectively stimulate economic growth property rights must exist within a society characterized by stable and predictable rules of law. Classroom Activity – Lesson 2: “Property Rights and the Rule of Law” Importance of Property Rights to Economic Growth and to the Well-being of the Poor Para, Brazil Amazon Basin Focusing the Research: The Role of Property Rights in Reducing Poverty We KNOW: • Economic growth is the key to reducing absolute poverty and raising standards of living. • One source of economic growth is increased productivity, the ability to increase output per unit of resource input. • Productivity is increased through investment in human and physical capital • People invest in their human capital by getting education, training, or experience. • Investment in physical capital includes developing and/or purchasing the buildings, machines, and equipment that make human labor more productive. • People take better care of things they own. Property rights act as an incentive for people to protect the value of their possessions. We WANT to know: • Are property rights a tool in fighting poverty? • Does the existence of strong property rights promote economic growth? • Does clear title to land encourage (act as an incentive for) capital investment? Research Question: On the Amazonian frontier of Brazil, are landholders with title more or less likely than landholders without clear title to invest in capital improvements to their land? Ricardo’s Journal • June 01, 1993 11:49 a.m. Fax to Dr. Lee Alston and Dr. Gary Libecap • The travel to São Felix was not too bad as I expected. We went on the back of a pick-up truck, and although crowded (13 people, 2 kids and two chickens on the truck and 4 people on the cabin) it was better than a bus. . . . Ricardo’s Journal • To get a better sample, I choose to survey the colony in the two opposite extremes. One 4 minutes down river from town (Santa Rosa) and other 5 hours upriver (Chadazinho). About half people I surveyd had definitive land tittle, but only a few are registered . . . and only few are in the name of landholder. Usually, the tittle is on name of the previous holder (i.e. when the previous owner sold the land, he gave as well the tittle). Sometimes the farmers got also a power of attorney paper, sometimes not. Registering the tittle and transferring is very expensive and this is the reason people usually do not do it. Survey Data Current Landholder’s Name Has Clear Title to Land ? Hect cleared Hect permanent crops added Chickens Cattle Pigs Horses Hect pasture added Meters fenced Almezino Yes 12.5 27.5 40 50 10 0 30 1600 Fco. No 20 22 200 2 4 3 20 2600 Raimundo Yes 17 25 80 11 1 3 14 240 Raul Yes 2 26 30 12 0 1 20 1000 Marcelo (1) Yes 0 0 10 0 2 0 0 0 Julia Yes 0 12.5 25 3 0 0 4 1500 Ant. Evang Yes 2 12.5 100 20 4 0 4 3300 Anor. Yes 0 15 70 0 12 0 1 2000 Geraldo Yes 8 35 70 100 35 10 20 8,000 Yes – The settler has a clear and legally recognized title to the land and the title would be upheld in a court of law. Current Landholder’s Name The number of hectares the farmer cleared since he became the landholder. Converting land to pasture required logging out the trees, and/or removing stumps and rocks, and/or seeding to create suitable grazing for cattle. (Land cleared by a previous owner is not included.) 1 hectare = ~2.5 acres, or 2.5 football fields. Has Clear Title to Land ? Hect cleared Hect Permanent crops added Chickens Cattle Pigs Horses Hect pasture added Jose Cirilio Yes 20 4 30 50 5 3 20 800 Vicente No 12.5 14 100 27 3 3 12.5 1000 NO - The settler has no claim to the land other than occupancy (squatter), or his claim is uncertain. For example, the settler holds a signed receipt from a previous owner, or the settler has a provisional title which hasn’t been registered. Permanent crops are usually tree crops such as bananas, coffee, and cocoa. Several years’ growth is required before they bear a significant crop. However, in the long run, they tend to be more valuable than annual crops (which are planted each year). Meters fenced Landholders could maintain livestock for their own use without much fencing. Raising cattle for market required fencing. Identifying Investment Activity Investment in Land? Yes / No Explanation Clearing land Planting permanent crops Buying chickens Buying cattle Buying pigs Buying horses Adding pasture Fencing . Calculating the Impact of Title Average investment in meters fenced Average investment in hect pasture added Title Title No title No title Average investment in hect perm crops added Title No title Average investment in hect land cleared Title No title Calculating the Impact of Title Average investment in meters fenced Average investment in hect pasture added Title Title No title 1551.5 No title 17.88 788.89 Average investment in hect perm crops added Title No title 20.31 5.5 Average investment in hect land cleared Title No title 15.31 16.56 10.5 Predict – Who Has Title ? Name Title to Land Hect cleared Osdete Hect Permanent crops added Hect Pasture added Meters fenced 0 ? ? Joao Golano 35 85 30 5500 Jose Carlos 25 1 25 0 Germano 18.5 44 0 0 Conclusions of the Pará Study • Farmers were aware that having title increased the value of their property • Farmers assessed the costs and benefits of obtaining title (distance, etc.) • Farmers with title made significantly greater levels of investment in the productivity of their land • Securing and enforcing the property rights of the poor is an important step in improving their wellbeing