Extreme Poverty and the Graduation Approach

Nearly 1.2 billion people are living below the extreme poverty line on less than $1.25 USD per day. Unfortunately, many of these individuals do not meet the qualifications of many poverty alleviation programs or are too consumed with meeting basic needs to apply for such programs. In partnership with the Ford Foundation, the Consultative Group to Assist the Poor (CGAP) set up ten pilot programs in eight countries (Ethiopia, Ghana, Haiti, Honduras, India, Pakistan, Peru and Yemen) to test and observe the “graduation approach” to poverty alleviation developed by the Bangladesh Rural Advancement Committee (BRAC). The graduation approach identifies individuals living in extreme poverty and provides them with basic resources, financial education, technical training, life skill coaching, and social support so that they can “graduate” from the program with food security and sustainable sources of income.

In September 2014, CGAP conducted evaluations of six programs that used the graduation approach. These evaluations were used to produce a detailed report that could serve as a technical manual for future programming. With the possible exception of the Honduran program, Mejoramiento Integral de la Familia Rural, five out of the six programs evaluated by CGAP had measurably increased their participants’ income, assets, food security, health, and happiness.

While CGAP’s evaluation supported the effectiveness of the graduation approach, it also identified some of the barriers to graduation. In order to achieve a truly sustainable income, participants needed to diversify their assets and income sources. This was particularly clear in Honduras where 83 percent of program participants had purchased chickens as a long-term investment. Unfortunately, many of these chickens contracted illnesses and died, plunging their owners back into poverty. Since illnesses and other acts of nature are often unavoidable, diversification of long term assets is essential.

Ultimately, the evaluations performed by CGAP and the Ford Foundation showed significant improvements for program participants. According to CGAP, pooled estimates of program participants’ per capita consumption increased 5.8 percent. In a true test of the graduation approach, per capita consumption continued to increase even after program support ended. The evaluations also revealed that participating families experienced fewer days in which a member of the household skipped meals or went a whole day without food. Finally, CGAP noted that the graduation approach had significantly and persistently increased household assets, improved psychosocial wellbeing, and increased self-employment income. By February 2016, 40 new programs had adopted the graduation approach. The success of the ten pilot programs established by CGAP and the Ford Foundation illustrated the efficacy of the graduation approach and ensured its use for decades to come.

Democracy and Development in Pakistan: Where are we headed?

On June 11th, 2014 the Center for International Private Enterprises hosted a panel discussion entitled “Strengthening Democracy through Economic Reform In Pakistan: Challenges and Opportunities.” Last May, the Pakistani Peoples Party (PPP) became the first democratic government to serve out a full term in the country’s 66-year history of independence. This historic accomplishment created a great deal of optimism and speculation about democracy and development in Pakistan. In light of this accomplishment, it may be important to question how successful democracy has been effective in Pakistan and whether or not democracy has promoted development.

The recent terrorist attack at the Karachi Airport, the arrest of Pakistani political leader Altaf Hussain in the UK, and the Karachi Riots in 2010 only highlight a share of the complicated political, economic, and social issues shaking the country’s fragile security. According to the panelists, the outlook for Pakistan is very pessimistic, unless the government recognizes these issues and takes action as soon as possible. According to Dr. Ehtisham Ahmad of the London School of Economics, the Pakistani government must address two core issues: the financing of political parties, and the management of state finances. The PPP and PLMN have both neglected these major issues, hindering institutional and political development.

The lack of a formal mechanism for funding political parties has led to politicians looking for funding from wealthy groups and individuals. As a result, purchasing votes and favors has become a regular occurrence. These factors have created an inefficient and corrupt tax system that does not generate revenue or demographic information. In order for a democratic country to run properly, tax revenue and demographic information is heavily relied upon.  According to panelist Moin Fudda of CIPE Pakistan, the government missed its tax collection target by 77% last year, which indicates a need for major reform. The graph below displays tax revenue for Pakistan and similar countries in South Asia. The data shows the decline of tax revenue in Pakistan over the last sixteen years to one of the lowest tax revenue percentages in South Asia.

Tax Revenue Pakistan

 

The population living below the poverty line has been hit the hardest. The central government has given the provinces the responsibility of providing public services for its citizens, such as healthcare and education, but the inefficient tax system has left them without enough funding. The provinces have no way of providing viable public services unless they do not pay taxes, inevitably leading to a tax war within the government. This inability to provide basic services has also hindered development.

Dr. Ahmad stresses that these issues need to be tackled immediately, but Pakistan has quite shockingly done nothing to find a viable solution. If the Pakistani government won’t act, then what else can be done  to remedy the situation? Dr. Ahmad believes that foreign investors can press for a level playing field in order to incentivize reform. The Pakistani government needs to implement a strong corporate income tax and provide public services for the poor, especially education. Most importantly, these core issues must be taken seriously by the government, and the population must strongly push for reform and public services. Despite these issues, the economy has performed quite well and has seen solid growth in the past four years according to the data below.

 

GDP Growth Rate

 

 

Pakistan GNI

 

At a time when political and economic  unrest is very high, people are wondering whether this growth is due to the development of an informal economy that is quietly keeping the formal economy afloat . This question is of great relevance and will unfold in the near future as the political demographics of the country either stabilize or spin out of control.

 

FIFA World Cup: Brazil’s Development Hopes

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Around the world, Brazil is known as the mecca of soccer. The country is loaded with magnificent soccer talent and has an electrifying atmosphere that makes soccer fanatics feel at home. Not to mention that Brazil has won the FIFA World Cup a record five times, and is the only country to have qualified for the World Cup every year since the tournament’s inception. One could not dream up a more soccer obsessed nation to host the 2014 FIFA World Cup that began this week. However, the current tension in the political, economic, and social atmosphere of Brazil has given the rest of the world an apprehensive feeling about this year’s tournament.

Political tension in Brazil has risen in recent years, as a majority of the county is unhappy with the government due to inflation, corruption, and the massive investment of public funds in World Cup preparations instead of Public Programs for the poor, who are in dire need. The estimated cost of the 2014 FIFA World Cup is currently at $11.5 billion. All this unrest comes at a time when Brazil has one of the most unequal wealth distributions in the world, currently entertaining a Gini Index of 54.7, along with a struggling economy. Some Brazilians hope that the World Cup will promote progress, while others worry that the event will push Brazil’s economy over the edge. It also gives rise to the question of whether the World Cup will only benefit the wealthy and further increase the gap between the rich and poor?

According to a recent survey by the Pew Research Center, 61% of Brazilians believe that hosting the World Cup will be detrimental to the economy as it diverts public spending away from public services. 67% also believe that the economy is in bad shape, which increased from 41% last year. Milton Hatoum, a writer from Manaus, asked: “Why does a city like Manaus need an expensive and luxurious stadium when a few meters away there’s a neighborhood, Alvorada, without sidewalks and treated sewage?”

The long-term social and economic effects of a mega-event such as the World Cup should be analyzed. To predict the path that Brazil may follow, it is helpful to take a look at the economic performance of similar World Cup host countries after the tournament. Their political, social, and economic atmospheres may vary, but this is the most direct and simple way to present the possible future outcomes for Brazil. The figures below display indicator data from the World Bank, showing the economic growth of  Argentina, Mexico, France, and South Africa since they hosted the tournament:

 

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It’s worth noting that Argentina, Mexico, and South Africa are more similar to Brazil’s economy and social structure compared to France. Argentina, Mexico, and South Africa all show a sudden rise in GDP Growth Rates, GDP, and GNI following their host year. In all four cases, the indicators suggest a short-term rise in GDP growth, followed by a decline. This gives rise to the heavily debated question of whether or not FIFA World Cup host countries see sustained long-term growth or temporary ripple effect growth following the event.

As we look ahead past this year’s FIFA World Cup, it will be interesting to see how Brazil’s economy fares. Our hope is that the result is a positive one, as the country’s economy is in need of repair. Hopefully the World Cup this summer gives the country’s economy a much-needed boost. At this point, the world will just have to wait and see.

 

 

Overnight Sensation

On April 30th, one of the major problems plaguing the economic world was partially rectified overnight. The International Comparison Project at the World Bank revised their purchasing power parity (PPP) data for 2011. PPP is a measure to balance the exchange rate between countries based on the purchasing power of of their currencies. PPP is calculated through a basket of goods. For example, if the Thai Baht is able to purchase more food relative to the US dollar, the PPP adjusts accordingly.

Graph depicting forecast of United States and China (The Economist)

One of the geopolitical implications of this change is that China’s economy is now larger than anticipated. The Economist reported that China’s PPP exchange rate is 20% larger than previously considered. This tweak of numbers means that, depending on estimates, China is the largest economy or will shortly be the largest economy in the world. Certain caveats need to be remembered, mostly that numbers self-reported by China always need to be taken with a grain of salt. That being said, the rebalancing is a reminder of what the future holds in store.

China’s inevitable rise is not the only news to come out of the International Comparison Project’s report. PPPs for 199 countries were redone, including most of the world’s developing countries. Sarah Dykstra, Charles Kenny, and Justin Sandefur from the Center for Global Development analyzed the numbers in the report and found an astonishing fact. Based on the new PPPs, global absolute poverty in 2010, defined as living on $1.25 a day, dropped from 19.7% to 11.2%. For example, Bangladesh’s GDP PPP per capita increased from $1,733 to $2,800. This revision caused 247.9 million Indians to no longer be below the absolute poverty line. It also means that more of the world’s absolute poor are now concentrated in Sub-Saharan Africa, increasing from 28% of global absolute povery to 39%. The reason for these drastic changes in figures is that inflation rates rose faster than the prices in the baskets of goods used in PPP calculations, which has been adjusted in the new 2011 numbers.

 

Global Poverty Rate (Center for Global Development)

While this may seem incredible, it merely reflects a statistical change in measurement. There is still  no consensus on whether $1.25 a day is the right measure to use for determining absolute poverty, even if it is adjusted for PPP. Other indicators have been proposed over the years. The most famous is the UNDP’s Human Development Index (HDI), attempting to include health and education along with GDP per capita. After examination, this was considered insufficient because it didn’t fully encapsulate the deprivations that poor people in developing countries face. The UNDP developed the Multidimensional Poverty Index, attempting to include things like the percent of the population that lacks a floor or clean water. As this is based on survey data, only 104 countries are included in the Multidimensional Poverty Index.

Another argument is that the difference between somebody with an income of $1.25 a day and $1.26 a day is not even negligible. Many suggest raising the line at which we measure poverty above the $1.25 a day of absolute poverty and the $2 a day of extreme poverty, with Lant Pritchett suggesting using $15 a day as the international line. What people in poor countries purchase is also vastly different from what people in developed countries purchase, negating some of the benefits of PPP. Poverty lines also vary between countries, so there have been advocates to change the global poverty line to be adjusted more frequently and be comprised of an average of developing countries.

Village in Africa, same scene before and after the ICP adjustments

This adjustment through PPP does not change the lives of those who are still living in poverty, whether their measured status changed or not by the new report by the ICP. They will still struggle to buy food and pay for school uniforms for their children, just as before. However, measuring global levels of poverty will remain important, as that which is measured gets fixed.

Piketty In A Coal Mine

Flooded Marina (Gas Pumps)" by Richard Misrach
“Flooded Marina (Gas Pumps)” by Richard Misrach

A new book by French economist Thomas Piketty has been causing quite a stir in academic circles over the past year. Now, with the translated publication of Capital in the Twenty-First Century, that fervor is about to spill out of the ivory towers and onto the streets. Piketty’s book ambitiously tackles the topic of economic inequality. His central thesis, in absolute simplest terms, is that the very rich are getting richer and the poor are staying put. Those who rely on wage income for their wealth (the middle class and the poor), Piketty argues, are not likely to see their lot improve in the near future. The very rich, who do not rely on wage income because they have capital in the form of real estate, financial assets, businesses, or patents, will continue to see their wealth skyrocket into the twenty-first century. Ultimately, if capital growth continues to exceed overall economic growth, Piketty worries that this striking imbalance will cause the breakdown of democratic institutions and the social fabric of society.

The Washington Post's "Wonkblog" considered this the graph of the year in 2013.
The Washington Post’s “Wonkblog” considered this the graph of the year in 2013.

Whether or not one agrees with his final premise, Piketty has done his fair share of research and is well respected within the economics field. While studying at the prestigious École Normale Supérieure and subsequently while teaching at MIT, Piketty began to collect historical data on income and wealth, something that economists at the time neglected to do. Although Capital in the Twenty-First Century was written for a global audience, Piketty has the data to back up his findings, though it has not gone without criticism. Most of Piketty’s harshest critics paint him as Marxist or Communist, when in reality he is merely challenging certain aspects of the current free market system – the part that contributes to a great deal of economic inequality. But any work that deals with inequality is bound to get political. And as Piketty notes in an interview with the New York Times, he is welcoming the debate.

Piketty’s ideas for solving this rising inequality are perhaps the weakest part of his argument. In his book he calls for a global tax on wealth that is at best impossible and at worst extremely out-of-touch with the political realities that frame any worthy discussion of policy prescriptions in developed countries. But we should not shrug off his work because of his ideas on policy. Piketty succeeds in collecting and presenting decades of historical data on an issue that has come to define the early twenty-first century. Working as an economic archaeologist, Piketty has made some fascinating discoveries. He has dug up a set of evidence that captures in a new light the increasing economic inequality today. His work is best read as a challenge to our current paradigm of economic inequality, not as a revolutionary tale of two cities.

Past Reconstruction to Constructing Rwanda

Twenty years after the genocide in Rwanda, things seem to be looking a bit brighter. With an average annual growth rate of eight percent since 2001 and over one million people lifted out of poverty, Rwanda is poised to continue growing by leaps and bounds. Even so, 20% of Rwanda’s economy comes from foreign aid, only trailing its exports of coffee and tea. As with most developing countries, one of the most visible signs of growth is the new buildings sprouting from the ground around the capital of Kigali. As impressive as office buildings and shopping malls are, it remains to be seen how beneficial these structures are to the economy and people of Kigali and other developing cities.

Construction workers in Kigali

The benefits of the construction industry in developing countries is clear. The global construction industry was approximately $1.7 trillion in 2007, and typically accounts for 5-7% of each country’s GDP. Jobs in the construction sector tend to be low-skill jobs, something that most developing countries, and especially Rwanda, have in abundance. A report by the International Labor Organization (ILO) found that workers in places as diverse as India, Brazil, and China were significantly more likely to be illiterate and have few years of schooling. Construction is also an investment, as there are roads, buildings, and other structures that can be used to house offices, transport goods, and improve the human and business capabilities. Kigali is already one of the most urbanized cities in Africa, and is expected to grow by 79.9% by 2025. Construction in Kigali and satellite cities is meant to ease congestion of an already dense capital of a densely-populated country.

Map of Rwanda

There are some issues with the construction industry in the developing world. The first one involves property rights. Large amounts of people in cities in the developing world don’t have a title or ownership to the land that they live on, especially in slums. Hernando de Soto, president of the of the Institute for Liberty and Democracy in Peru, has referred to slums as “dead capital”, alluding to the idea that people make improvements by building shantytowns but are not able to use it for collateral due to red tape. The perniciousness of not actually owning the land that one’s house is built on is even worse. In Kigali, 70% of housing is informal, with the government proposing to demolish that housing and creating more high-density areas and rent-to-own schemes. However, housing in the suburbs of Kigali currently typically costs 25,000 francs ($36.87) a month in a country where 45% of people still live below the poverty line. There’s a fear that parts of Kigali could end up like Nova Cidade de Kilamba, a suburb of Luanda that is a ghost town built and funded by the Chinese.

Developing countries, and Africa in particular, have been raising questions about who benefits from the construction industry. Recent reports by investigative journalists from the Forum for African Investigative Reporters (FAIR) in Kigali have found that foreign firms, notably the Chinese, have done a substantial portion of construction. The Chinese are able to undercut local firms by using Chinese contractors backed by subsidized loans provided by the Chinese state. An operations engineer at a Chinese company working in Rwanda stated that his company could get loans with an 8% interest payment while Rwandan companies could only obtain loans with 17-18%, if they could even get a loan at all.

The view of Kigali’s town center and surrounding areas

There is a final concern about construction and corruption. Since construction contracts tend to be a fee and cost of materials, construction companies tend to be implicated more frequently. They overstate the amount of labor used on a project, pocketing the difference. One field experiment in Indonesia found that an increase in official audits of construction projects reduced missing expenditures of labor, ie nonexistent workers, by between 14 and 22%. Construction and engineering companies dominate the current World Bank list of debarred firms, the largest of which was SNC-Lavalin, a Canadian firm, which was debarred over bribery charges around the $1.2 billion funding of the Padma bridge in Bangladesh. Because of these troubling factors, questions, concerns, and confidence over construction in cities like Kigali will continue to surface.

Idealism Vs. Realism: The Need for Accountability

Last Thursday, the Hudson Institute hosted a discussion with Nina Munk on her book The Idealist: Jeffrey Sachs and the Quest to End Poverty. The book follows Sachs’ work to end poverty through Millennium Villages. The imgresproject provided improved fertilizer and mosquito nets to fourteen rural villages in Sub-Saharan Africa. Many in the development community view the project as a failure because of its inability to create sustainable development. Munk used the discussion to highlight the overarching themes in her book and to answer audience questions about her experience working with Sachs.

One major theme repeatedly appeared throughout the discussion: NGO and development accountability. Munk attributed a large portion of the Millennium Village failures to a lack of accountability. According to Munk, throughout the project Sachs refused to take the advice of on-the-ground development workers. He ignored the varying cultures, infrastructures, and economies of each village and how that would impact the individual development of each village. Quantitatively, the project seemed to be a success. It increased the corn production of villages and reduced starvation. But the increased corn production did not translate into long-term economic gains. The starving villagers were fed but what the project did not solve was the lack of a market or infrastructure to sell corn.

Munk claims that Sachs’ project needed an accountability structure. There were no measures to evaluate the success of the project beyond the quantitative numbers. There was no consequence for a failed venture and even now Sachs refuses to acknowledge the shortcomings of the project.  She equated the Millennium Village to a game of whack-a-mole. One problem would be solved only for six more problems to crop up. An accountability structure could have evaluated the project from the beginning and addressed its shortcomings in a timely fashion.

Sachs promoting the Millennium Village Project
Sachs promoting the Millennium Village Project

During the discussion Munk put forth the question of how to translate low hanging fruit into sustainable development beyond simple quantitative measures. An evaluative structure needs to be in place to measure the holistic success of development projects. The development community cannot afford to base success on purely quantitative measures. Munk claims the development community has a fear of failure and as a result does not acknowledge its mistakes. Making a humorous, yet genuine, suggestion, Munk proposed every organization should have a “Failures” section on its website. This way there is transparency across the development community and it can continue to learn from its past mistakes.

One attendee brought up a great question concerning the accountability of publicly traded companies compared to non-profits and development work. If an official in a publicly traded company breaks the law or creates a failing project, he is held accountable, whether it be through fines, prison time, or unemployment. Why then does the development community not have the same punishments for failure? There are no consequences for organizations creating unsuccessful development projects. The people who suffer most are those that are supposed to benefit from development projects. Should an industry that deals with human livelihood have strict punishments for failure?

The point of accountability is especially salient considering the financial outlook on development. As Munk described it, the amount of money, private or public, put towards development is not going to radically change in the coming years. It maintains consistent, incremental growth. Development work needs an accountability structure to ensure that this money is not going to waste. Munk claims the development community needs to be upfront about what it can and cannot accomplish so that it does not waste money on impossible projects that have already failed in the past.

Please click here to watch the full discussion with Nina Munk.