The root causes of poverty

GiveWell generally focuses on the question of how to get “bang for your buck” as a donor – help as many people as possible, as much as possible. Against this approach, one might seek to factor in the potential of a program to get at the “root causes” of poverty, and start – or be part of – a chain reaction that ends poverty at the country or even world level. (One example of such reasoning in nonprofit marketing is here.)

Below is our take on the following broad question:

Why have some parts of the world emerged from poverty while others haven’t? How can financial aid from developed nations best be directed to cause large-scale emergence from poverty?

To us the key points are:

Past emergences from poverty have taken many different forms; there are no clear/consensus patterns or formulas in these stories.

This statement – which we have seen little to no literature contradicting – is well illustrated by the work of two major commissions, each of which set out to find patterns in the history of economic development.

A 1993 World Bank study on the rapid growth of 8 countries in East Asia concluded (overview; similar content on page 366):

The study attempts to explain East Asia’s success and to develop a model of rapid growth with equity. It finds that the diversity of experience, the variety of institutions, and the variations in policies among the [high-performing Asian economies] does not allow a model to be developed.

A more recent (2008) study, “led by 19 experienced policymakers and two Nobel prize-winning economists” (from the press release), contains similar caveats (from page 2):

The report identifies some of the distinctive characteristics of high-growth economies and asks how other developing countries can emulate them. It does not provide a formula for policy makers to apply—no generic formula exists. Each country has specific characteristics and historical experiences that must be reflected in its growth strategy. But the report does offer a framework that should help policy makers create a growth strategy of their own. It will not give them a full set of answers, but it should at least help them ask the right questions. Fast, sustained growth does not happen spontaneously. It requires a long-term commitment by a country’s political leaders, a commitment pursued with patience, perseverance, and pragmatism.

There are many different prescriptions for the actions most likely to end poverty.

Various scholars propose large-scale plans – based on theories of the root causes of poverty – for ending (or drastically reducing) poverty. However, it should be noted that their plans (a) are very different from each other; (b) tend to be highly multidimensional and to depend heavily on governments and/or international institutions. (In other words, few put a single “silver bullet” intervention at the heart of their plans.) Three prominent examples:

  • Jeffrey Sachs (The End of Poverty) argues that poverty itself is self-reinforcing: when people and governments have low enough income, they cannot make the necessary investments to create strong future growth (see pages 245-250). His recommendations, presented in the UN publication Investing in Development, center around aid to developnig-world governments, in support of multidimensional and country-specific poverty reduction strategies (page xx). Such aid is to be roughly doubled from 2003 levels by 2015 (page xxii); other recommendations include loosening trade restrictions and increasing relevant scientific research (page xxii).
  • Paul Collier (The Bottom Billion) believes the world’s poorest countries are caught in one or more of four “traps” (page 17): patterns of civil war (chapter 2), “resource curses” in which large natural resource wealth prevents healthy economic development (page 39), the condition of being “landlocked with bad neighbors” (53), and bad governance in small countries (65). His agenda (177-183), like Sachs’s, includes an emphasis on free trade, but it also includes major roles for military intervention to deal with conflict as well as international laws and charters to hold governments accountable. Although he supports aid to some governments (179), he specifically cautions against the dangers of too much aid in some cases (page 181), and proposes circumventing governments through “independent service authorities” in others (177, 179).
  • Peter Timmer (Agriculture and Pro-Poor Growth: an Asian Perspective) argues that “No country has been able to sustain a rapid transition out of poverty without raising productivity in its agricultural sector” (page 3) and recommends a set of interventions focusing on rural areas, particularly agriculture (pages 29-30).

There are reasons to see health aid as a promising approach to reducing poverty. There are also reasons to see it as neither necessary nor sufficient for this goal.

The idea that improving health would lead to improved productivity, and thus less poverty, is one that makes intuitive sense and has some suggestive evidence to support it. Working Group 1 of the WHO Commission on Macroeconomics and Health (PDF) summarizes many different kinds of evidence including cross-country analysis, studies on the productivity of people receiving nutrition supplements, and analysis of changes in calories available over time (see pages 5-12 for an overview, although we are looking for a clearer and more complete review on this topic).

But there is little reliable guide to how much economic improvement can be expected to come directly from health improvement, and even strong advocates of health aid such as the Commission on Macroeconomics and Health do not see health aid as sufficient (by itself) to end poverty. (See pages 28-29 of the commission’s final report.) There is also no consensus that health aid is necessary; some see past emergences as having been led by agricultural improvements (such as Timmer, discussed above) and/or having been accomplished largely without external assistance of any kind (as William Easterly does – see page 347 of White Man’s Burden).

Bottom line

No single theory of the “root causes of poverty” is supported by overwhelming evidence or broad expert consensus. We don’t find any compelling enough, or relevant enough to what individual donors can do, to compete strongly with the goal of improving individuals’ lives – a goal that could itself be the best approach to speeding the end of poverty, particularly if you believe (as scholars such as William Easterly do) that the emergence of nations is most likely to be homegrown.

There are many proven, cost-effective, scalable ways to significantly improve people’s lives. We feel that adding to one is the best use of an individual donor’s funds.

Comments

The root causes of poverty — 16 Comments

  1. The article focus is: “Why have some parts of the world emerged from poverty while others haven’t? How can financial aid from developed nations best be directed to cause large-scale emergence from poverty?”

    I have always found distribution of wealth is terribly askew and is a direct cause of poverty in certain segments of a society lacking adequate resources for food, clothing, shelter, medical care and other necessities, let alone any amenities of a beyond subsistence living. As the U.S. begins this economic downturn it is the middle class that is the new homeless etc…. I will venture that the solution to poverty must be multifaceted and would also suggest that the capstone of any solution is “fair wealth distribution”.

    I will close with this quote from Dom Helder Camara:

    “When I give food to the poor, they call me a saint. When I ask why the poor have no food, they call me a communist.”

  2. Geoff, thanks for the link – that’s an interesting paper, and I agree that it’s a similar point. The recent William Easterly paper (Can the West Save Africa? PDF) also argues for a focus on what Easterly calls “marginal” impacts as opposed to “transformational” poverty-ending ambitions. (Easterly and Banerjee do have different audiences in mind from us – Easterly is speaking largely about what the international aid community is focusing on and Banerjee is writing about what research should focus on, whereas we are talking about what individual donors should focus on.)

    Ernesto, the question we are trying to analyze is how people can make the best use of voluntary gifts to help the poor.

  3. “Little else is requisite to carry a state to the highest degree of opulence from the lowest barbarism but peace, easy taxes, and a tolerable administration of justice: all the rest being brought about by the natural course of things.” – Adam Smith

  4. Hi Holden,

    Ernesto, in a vague kind of way, makes a relevant point. There are some (I am one) that think that poverty is not an accident, but a policy. Put simply, poverty provides an incentive to work, whatever the wages. Without poverty, people might not want to take jobs without far higher pay-offs. If labour costs are high, investors will put their money somewhere else if they can. Therefore, if states are concerned to foster investment, they will want to maintain a high rate of profit. Abolition of poverty does not help that, even if all the money for it comes from outside. In the absence of countervailing power, anti-poverty charity just gives employers a chance to lower the wage bill, increasing their own profits.

    So how should you help poor people who live in this situation? Maybe with charities that support subsistence agriculture, to remove dependence on employers? Looking forward to a response,
    kind regards, Joe.

  5. Joe,

    How does your hypothesis explain how some places, such as Singapore, South Korea, and Chile, have seen great reductions in poverty in the last year, while others have stagnated or even declined?

    It’s not clear how subsistence agriculture will yield great economic prospects; as far as I’m aware, no country has successfully developed without an increase in farm productivity.

  6. “the last year” should read “the last decade”, of course. I really need to proofread these comments more carefully.

  7. Ian,

    The theory is not designed to explain short/medium term variation between countries, since it’s a theory of a long-term process.

    It can, however, explain why, over the long term on a global level, poverty has not been seriously eroded, even when the (relatively trivial) resources to do so have been available for decades. And it can explain this more plausibly than other theories (like Collier’s “traps”), given that the present “developed” countries had all these problems when they were developing in the 19th century, and they managed to overcome them.

    It also has far more range, since it can explain the persistence of poverty within rich countries. You can’t just unionise and get a higher share of your company’s profits because the shareholders will jump ship.

    There are some basic conceptual issues too drawn out to go into, like definitions of poverty (is Chile poverty-free), the difference between countries and within them etc.

  8. Joe, when you say “it’s a long-term process”, are you saying that you expect Singapore, South Korea, and Chile to return to poverty? I don’t mean to say that there is no poverty in these countries now, but in the last decade there has certainly been a dramatic reduction in poverty by any sane definition of that word.

  9. Ian,
    I mean that individual countries may do better or worse, but global poverty is unlikely to go until poor people themselves (not just the national elites either) have some meaningful say over how society’s investment decisions are made. It’s a theory of a long term process *across a population of cases*, i.e. globally. It’s doesn’t make any predictions about specific countries. There are practically no theories in social science that can cover every case. I suppose if I was being thorough I would ask why these countries are outliers, but it doesn’t affect the central hypothesis.

    I can though have a go at explaining these outliers, but I’ll have to clarify the point first.

    I kind of assumed as given that there is a ‘dependent’ division of labour in the global economy. Poor countries cannot capture the high-value added processes along the production chain, but are limited to low-value-added resource extraction or simple manufacturing. Brazil makes components for Volkswagons, but it will never be able to compete at making whole cars, so most of the real profit stays in Germany, gets re-invested there, and so the technically advanced economies like Germany get even more advanced so it’s impossible for Brazil to catch up.

    The point I made in my first post applies to dependent-developing countries like Brazil, mexico, etc. that have little chance of competing on equal terms with developed countries for really profitable work, making cars, planes, medicines, etc. For the rich countries, it’s fine to pay a little more to buy labour peace, it creates a national alliance between workers and companies to keep the monopoly on higher=productivity products. The far bigger sum goes into technology than wages, which is comparatively trivial. But low-value-added, low-productivity activities need cheap labour. For the dependent / poor countries, the abolition of poverty would just mean capital flight to the next population of acquiescent poor people where wages are lower, until wages sink again in the first country.

    Some countries, like those you mentioned, do however manage to break the spiral of third world dependency through their incorporation into high-value added parts of production chains, for contextually specific reasons (e.g. South Korea as recipient of US aid as bulwark against communism, Singapore seems like a glorifed tax-haven – incidentally I have heard the poor people there are not Singapore citizens, just temporary workers from India etc.) But what’s possible for a handful of countries is not possible for all countries all at once. Not everyone can do the high-value added inputs, otherwise there is are no low-value imputs, like mining the iron in the first place. The world bank wants every country to focus on producing for export like South Korea, but if they all did who would import all the new products? Not every country can develop finance like Chile, Singapore etc. So these cases don’t really affect the hypothesis, which is aimed at the global economy/society.

    I hope this has clarified something, thanks for your question.

  10. Joe,

    This clarifies your hypothesis quite a bit, thanks for explicating. I still think it is flawed.

    The idea that there is a never-ending demand for “low-technology, low-productivity” activities presupposes that the labor market is a zero-sum game. Essentially, you suppose that there are a certain number of unproductive jobs out there, and some group of people will get them and be poor. The reality is that the number of unproductive jobs is highly elastic and depends on the overall labor force productivity. In your example, you say that “the abolition of poverty would just mean capital flight”, but that would only be true if wages rise without a concurrent rise in labor force productivity.

    Let me fill this in with an example. In the US, we manufacture and recycle glass bottles with a minimum of labor: The bottles are formed, filled, capped, and boxed with automated machinery, and delivered to warehouses in efficient containerized transport. After use, assuming the bottles are recycled, we continue this labor-efficient process in reverse: Bottles are collected by the dozens or hundred at a time, loaded into trucks using mechanical equipment, and finally delivered to an automated sorting facility where different types of glass are (automatically) seperated and sent back for the next generation of bottling.

    In India, glass bottle recycling works like this: Your local bottling agent comes and picks up your used (intact) bottles, and delivers them to the bottling company, where they are washed (by hand) one at a time, refilled, and capped (by hand). This process is cheaper than the American process, but only because of the lower labor cost in India. If labor were more expensive, this work wouldn’t shift elsewhere: It would disappear, because the workers would be replaced by machines.

  11. Ian,

    I agree that companies are as likely to invest in labour-saving machinery as move to another developing country when wage demands increase. In both cases workers in the country are put out of work, meaning no income and presumably poverty. On this reading your point would complement rather than undermine the model.

    I will anticipate that someone will say that there can be growth to create jobs for the laid-off workers after capital-substituion, at higher levels of productivity and presumably the new high wage levels that satisfy workers.

    However a continued escalating spiral of growth in wages and productivity at full employment is impossible for most developing countries. It would imply that eventually the complexity of the economy grows to the point where they start making fancy goods like cars, ships, machinery itself. As I explained I don’t think they will ever be able to compete with the current leaders with these products in the developed countries, who have this technological lead and are in a great position to out-compete competitors. So developing countries will compete on they only thing they can which will be mainly cheap labour.

    So in conclusion this leads me to think that localised endogenous development that is somehow able to put the needs of the population ahead of those of investors is the best route, and sustainable peasant agriculture would play a valuable role. (Check out charities like Via Campesina.) Of course we are just scratching the surface here, people should read the research literature to get authoritative views.

  12. Joe,

    You haven’t given any evidence to support your thesis that developing countries “will ever be able to compete with” developed countries, nor have you answered any of the counterexamples I provided.

    If your thesis is correct, how is it that Japan progressed from cheap plastic goods to making the best cars in the world? How did Singapore change from a place of poverty to a leader in oil refining, transportation, and information technologies? Even now, how is it possible that India is progressing from low-value call center work into software development, business unit outsourcing, and even the development of global conglomerates?

    Please think carefully and address these issues before responding.

    Thanks,

    –Ian

  13. Ian,

    Such a patronising remark ought to embarrass anyone seriously committed to scientific discourse.

    Again you are pulling out individual cases to try to refute a probabilistic hypothesis. It~s like charities that only put positive examples on their website: you can´t evaluate any of the claims when they select cases on the dependent variable. Let me explain it again as my first attempt was too quick. In the world there are rich and poor countries. Why are some rich and others poor? It’s not war, bad governance, bad health, the influence of poverty itself (Sachs), because the rich countries had all these and it didn’t stop them becoming rich. It must be something else. I think that terms of trade can explain it. The presently rich countries did not have declining terms of trade when they were creating their wealth, simply because there were no pre- existing rich countries to compete with. Yet for the developing countries the TOT have been declining progressively, whether for their raw materials like coffee etc, or for whatever manufactures they make. So in the majority of cases their international trade gets pidgeonholed into providing more basic inputs into the more advanced technical systems of the already-developed world. I’m sure anyone interested can find stats on the terms of trade between developing and developed countries, it’s one of the main themes of the discussion. Try looking up the names Raúl Prebisch (economics), Wallerstein (sociology).

    Yes, some asian countries have done well in reducing poverty. In the cases of South Korea and Japan, this is due to USAnian aid combined with massively interventionist industrial co-ordination, in other words the retreat from the free-market dependency theory would predict would work. Singapore and Chile I know nothing about, however I get the impression that India is not a case of the abolition of poverty even in its minimalist definition. I don’t have time to do case studies on the outliers you mention, and unless someone explains how they are representative of some alternative theory about how global poverty can be abolished, I don’t see why we should focus on them.

    Seeing as I’m not going to get an answer from the experts for how I should distribute my money, I’m done here.
    -Joe

  14. Just wanted to note that I’m not planning on getting involved in a discussion of this particular theory of the “root causes of poverty.” Doing an evenhanded assessment of every prominent theory would take endless amounts of time; instead, we note that such theories must have overwhelming support (both in terms of evidence and scholarly backing) before we’d consider acting on one, because acting on one (particularly one like this) would mean making significant, concrete sacrifices for a benefit that we can’t even begin to assess (and provide a reality check on) until well after the costs are incurred.

    We have no problem with people continuing to discuss this or other theories in the comments, but aren’t likely to participate ourselves