The economics of poverty starts right at the beginning

 

ROBERT COLVILE

A boy of 14 stabbed on a bus — another victim invisible to elites

Something in Britain is broken but a ruling class dominated by the comfortable too often fails to notice

Robert Colvile

Sunday January 12 2025, 12.01am, The Sunday Times

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On Tuesday, Kelyan Bokassa was murdered. Stabbed on the upper deck of the 472 bus, in the middle of the afternoon, as it travelled down Woolwich Church Street in south London. The most striking thing about this awful crime wasn’t the tearful tributes from his mother and teachers. Or the grim details of the 14-year-old’s life that she and others provided: groomed by gangs from the age of six; living on the streets for a year; turning up on her doorstep sick, underweight and tattooed; the time in care; the looming court date for possession of a machete. It wasn’t even that his attackers didn’t bother to cover their faces. It was that they were, reportedly, both teenagers too.

The headlines last week were — thanks to Elon Musk — dominated by the rape gang scandal first exposed by Andrew Norfolk of The Times. An awful lot of people have been asking why the scandal was ignored for so long. And there is a simple answer. Yes, a lot of well-meaning, middle-class people were terrified of being thought to be racist. But even once the scandal was exposed, the victims were largely invisible. It had happened to them, not to us.

It’s the same when it comes to knife crime. In 2022-23, of the 244 people killed by “sharp instruments” 26 per cent were black, more than six times the share of the population. Of those, 40 per cent were under 25, versus 24 per cent for white victims of the same crime. Yet for most of us — at least most of us reading The Sunday Times — gang violence is something done by other people to other people.

Kelyan Bokassa’s story is heartbreaking, but unutterably distant from our day-to-day concerns.

And it’s not just crime. There are all kinds of statistics that show how divided we are as a nation. One in nine schoolchildren in Newham, a borough in east London, are classified as homeless. The richest parents are more than twice as likely to be married as the poorest. There are huge variations in employment rates, levels of family breakdown, even life expectancy.

This isn’t just about pockets of deprivation, but a wider malaise. Fraser Nelson pointed out in a recent Channel 4 documentary that sickness benefit approvals and renewals have now passed 3,000 a day, up threefold since the pandemic. About 3.2 million people are “on the sick” — in particular in places like Birmingham, Glasgow and Manchester, where roughly a fifth of people are on some kind of out-of-work benefit. Welfare dependency, knife crime, antisocial behaviour, derelict high streets — all are concentrated where the middle classes don’t see them.

Sometimes such low-income communities are neglected by politicians: a striking report from the Stonehaven consultancy recently found that all the constituencies that swung to Reform had a “missing” road project, long promised but never built.

But in many cases they find themselves bearing the brunt of politicians’ decisions. Last year the think tank I run, the Centre for Policy Studies, produced a big report on immigration. One of our most striking findings was how disparate the effects have been. There were constituencies, such as East Ham in London, where only 27 per cent of school pupils had English as their first language; and constituencies, such as Workington in Cumbria, where the figure was 98 per cent. There were places where less than 5 per cent of the population had arrived since 2001, and places where the figure was more than a third.

Inevitably, therefore, experiences of migration had been very different. For the rich it meant cheap labour — in shops, on hospital wards, in their homes. For the poor it meant increased competition for jobs and housing, plus an unprecedented transformation in the communities around them.

Indeed, as the writer Ed West pointed out last week, it has always been the poor who have had more reason to be resentful of mass migration — and had their concerns fobbed off. He tells the story of two women from Barking & Dagenham, which went from 81 per cent white British in the 2001 census to 31 per cent 20 years later. They pleaded with their MP, Margaret Hodge, to “live here for two or three weeks and see what it’s like”. She told them she was there “pretty often”, but “times have changed and we have to move on with them”.

Even when we do make policy for the left-behind, it is often laced with the most patronising of assumptions.

In 2016 I visited New Orleans to study its school system. The city was for a long time home to some of America’s poorest people and worst schools — even before Hurricane Katrina wiped large parts of it off the map. Yet after Katrina something extraordinary had happened. New Orleans rebuilt its school system on the same lines as the academy revolution in England — handing power to head teachers and school chains, rather than imposing top-down control. The result was a flourishing of brilliant schools that were unapologetic about demanding the highest standards from the worst off.

At Samuel J Green Charter School — 95 per cent African-American, 95 per cent on free school meals — the walls were plastered with pictures of the first black president, the first black senator and so on. Even the year groups were named after the date the kids would graduate from university — historically a foreign concept. City-wide, standards soared and failure plummeted.

It may seem a long way from charter schools in Louisiana to a stabbing on the 472. But the education reformers in New Orleans, and their allies in England, shared a sense of moral mission: a belief that high standards, knowledge and discipline shouldn’t just be for the middle classes. That you helped the worst off not by pandering to them, but by giving them the same opportunities, structures and support as their better-off peers.

This is why I was so upset about the last government’s failure to make reversing the scandalous rates of post-Covid truancy a national crusade. And it’s why I’m even more upset about the new government’s education plans. So much of the coverage has been about the taxation of private schools. But far more corrosive, as Michael Gove has argued, is what is being done to free schools and academies, not least via the new schools bill. Reasserting Whitehall control over everything from salaries to school uniforms.

Cancelling funding for new free schools, or for academy chains that want to take over their struggling counterparts. Rewriting the curriculum to make it less challenging and more “diverse”. Taking responsibility for failing schools away from visionary educators and handing it to civil servants. Giving unions everything, and parents nothing.

The murder of Kelyan Bokassa — and the rape gang scandal — show that something in Britain is broken. That a ruling class dominated by the comfortable too often fails to notice the travails of those who are not. How depressing that Labour is sabotaging one of the few programmes that is doing anything to help.

How to escape the middle income trap

 Economic development

Indermit Gill on what China and India must do to join the rich club

First invest, then infuse foreign technology and then innovate, says the World Bank’s chief economist

Illustration: Dan Williams

Aug 12th 2024

“TO GET RICH is glorious” is the maxim that inspired one of the most successful development strategies of the past 50 years. It’s an aspiration widely shared across developing countries—and for good reason. When countries become wealthier, the results can be glorious. Living standards rise. Poverty recedes. The propensity to pollute dwindles, as products and production methods improve.

That’s why a growing number of developing countries are setting national deadlines to become developed economies: China by 2035, Vietnam by 2045, India by 2047. In the absence of a miracle, their chances of success are slim—because of a distinctive affliction that strikes countries as they climb the income ladder. In the coming decades the fate of the world will depend on whether it can be cured.

In their drive for wealth, few countries get anywhere near the top. Economic growth in developing countries tends to level off during the middle-income stage. It’s what the World Bank calls “the middle-income trap”. This idea has been disputed over the past decade or so. Yet the latest evidence is compelling: since 1970 the average per-person income of middle-income countries has never risen above 10% of the level in America.

Since 1990 only 34 economies have managed to move up from middle- to high-income status—and more than a third of those were beneficiaries of either integration into the European Union or previously undiscovered oil. The number of people living in these economies is less than 250m—roughly the population of Pakistan.

Today middle-income countries (defined by the World Bank as having gross national income per person of between roughly $1,150 and $14,000) are home to about 6bn people and nearly two-thirds of those who struggle in extreme poverty. They produce about 40% of the world’s economic output and nearly two-thirds of its carbon emissions. In short, the global effort to end extreme poverty and spread prosperity and liveability will largely be won or lost in these countries.

Middle-income countries now face far heavier burdens than their predecessors did: ageing populations, geopolitical and trade frictions, and the need to speed up growth without fouling the environment. Yet most remain wedded to an approach out of the last century: policies focused heavily on attracting investment. That’s the equivalent of driving a car entirely in first gear: it will take forever to get to the destination. A few try to leapfrog to innovation. That’s the equivalent of shifting from first gear to fifth and stalling the car.

There is a better way. The World Bank proposes a sequenced, three-pronged plan.

Low-income countries are best served by a strategy focused mainly on attracting investment. Once they become lower-middle-income countries, they need a more sophisticated approach. Investment must be supplemented by the deliberate infusion of technology from abroad. That means acquiring modern technologies and business models and diffusing them domestically to enable enterprises to become global suppliers of goods and services.

Infusion requires an ever-larger talent pool: more engineers, scientists, managers and other highly skilled professionals. To expand the pool, skills must be sharpened across the workforce. One of the most self-defeating attributes of middle-income economies is their proclivity to sideline women by limiting their educational and economic opportunities. The payoff can be immense when such practices are halted. In America, for example, more than a third of the growth that occurred between 1960 and 2010 can be attributed to decreasing racial and gender discrimination in education and the workforce. Without these changes, America’s income per person would now be $50,000, not the $80,000 it is.

Once a country has mastered both investment and infusion, it is ready for the final push—towards global innovation. South Korea stands out in all three categories. In 1960 its per-person income stood at just $1,200. By the end of 2023 it had climbed to $33,000. No other country has managed to pull off a performance like that.

South Korea began with a simple set of policies to increase public investment and spur private investment. That morphed in the 1970s into an industrial policy that encouraged South Korean firms to adopt foreign technology and more cutting-edge production methods. Samsung, once a local trading company dealing in dried fish and noodles, began making televisions using technologies licensed from Japanese companies.

Samsung’s success fuelled demand for engineers, managers and other skilled professionals. The South Korean government did its bit to help the economy meet this demand. The education ministry, for instance, set targets and increased funding for public universities to help develop the new skills sought by domestic firms. The results are clear to see. Today Samsung is an innovation powerhouse—one of the world’s two largest smartphone manufacturers and its largest memory-chip manufacturer.

To make the transitions necessary to reach high-income status, governments in middle-income countries must enact competition policies that create a healthy balance between large corporations, mid-sized firms and startups. The benefits will be greatest when policymakers focus less on the size of the company and more on the value it brings to the economy, and when they encourage the upward mobility of all of their citizens instead of fixating on zero-sum policies to reduce income inequality.

They should also seize opportunities arising from the need to tackle climate change—by producing and exporting electric vehicles, wind turbines, solar panels and so on. Middle-income countries should not be expected to immediately forgo the use of all fossil fuels in their quest for faster economic growth. But they should be expected to become more energy-efficient and cut emissions.

If they stick to the old approach, most developing countries will miss their target of reaching high-income status by the middle of this century. On current trends it will take China another 11 years to reach just one-quarter of America’s income per person. It will take Indonesia 69 years and India 75. By adopting a “3i” strategy—first investment, then infusion, then innovation—they can multiply their odds of getting there. The rest of the world would benefit, too, because policies that reward merit and efficiency enable growth that is quicker, kinder and cleaner. ■

Indermit Gill is chief economist and senior vice-president of the World Bank Group.

Globalisation and poverty - a counter-factual

 

Globalisation may not have increased income inequality, after all

A new study questions the received wisdom on trends within countries

photograph: stephen shaver/upi/shutterstock

Mar 7th 2024

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Working out who earns what is surprisingly tricky. Both the very rich, who sometimes try to keep their wealth from the taxman, and the very poor, who are sometimes mistrustful of clipboard-wielding officials, are especially hard to pin down. Nevertheless, before the covid-19 pandemic, household surveys consistently found a fall in the number of people living in poverty. The World Bank counted 659m living on less than $2.15 a day in 2019, down from around 2bn in 1990.

Yet this progress came at a cost: a global “precariat” emerged, members of which were barely out of poverty and perilously exposed to shocks, while the top 1% got rich faster. That, at least, is the received wisdom. The World Inequality Database, a project associated with Thomas Piketty and Gabriel Zucman, two economists, combines tax data with other sources of information to estimate the incomes of the uber-rich. They have found that although inequality between countries has fallen, as the rest has caught up with the West, within countries it may have risen. Chinese and Indian elites have done the best relative to their countrymen. American and European plutocrats, who are busy stashing wealth in tax havens, have done well, too.

A new paper by Maxim Pinkovskiy, Xavier Sala-i-Martin, Kasey Chatterji-Len and William Nober, economists at Columbia University and the New York branch of the Federal Reserve, challenges this picture. The researchers look at how likely people in different parts of the income distribution are to understate their income. They find that as the poor become richer, they become more likely to do so. Once adjustments are made for this, poverty has fallen faster than previously thought, and inequality within countries has not risen. It may even have fallen slightly.

To reach this conclusion, the authors look at the difference between estimates of income from regional household surveys and gross domestic product in the same area. When surveys imply that a region has less overall income than official figures, it suggests more income is going unreported. The researchers find that the richer an area, the larger the gap tends to be. This makes sense, notes Mr Sala-i-Martin. As a subsistence farmer becomes a small business owner or market trader, he develops more complex income streams and has more incentive to mislead the taxman.

If the finding holds, it changes the history of globalisation. Rather than a precariat, the researchers conclude that a “true global middle class” has emerged. Its members will not be plunged back into poverty by a financial crisis or a pandemic.

Yet the study will not be the final word. Economists have been arguing about trends in global inequality—and the quality of the data that lie beneath them—for decades. When it comes to the world’s richest people, the new research has more to say about the top 10% than the top 1%, who are widely believed to have done so much better than the rest. Like most papers, this one relies on assumptions that could be challenged by other researchers. Working out the global income distribution is one thing; convincing others you have the right answer is quite another.

Consider this when you hear arguments about foreign aid:

 

CHINA IS TYING THE GLOBAL SOUTH TOGETHER INTO A NEW FORCE

A Long March to the South

compactmag.com

China’s Belt and Road infrastructure-building initiative has transformed the economies of the Middle Kingdom and the Global South, says David Goldman. What’s less appreciated in the West is the “profound impact” of what Chinese officials call the Digital Silk Road: Beijing’s efforts to “penetrate the Global South’s digital infrastructure”, using artificial intelligence, “thus reshaping entire regional economies to its preferences”. 

BIG TECH IS A BLESSING

Three-fifths of global employment is “informal, outside the margins of the world market, insecure, excluded from government services and miserably poor”. Digital technology, though, is changing everything. A cheap smartphone might cost 30% of the monthly income of the world’s 2.5 billion poorest people, but it connects them to the world economy. Impoverished people trapped in subsistence agriculture and barter can then become entrepreneurs. Once internet penetration reaches a threshold of 60%, business formation in the Global South booms. 

Real per-capita income in Southeast Asia, for example, has doubled since 2010 and has the world’s highest growth rate and fastest rate of business formation. This is the fruit of Beijing’s efforts. China “may do many things badly”, but it did “one big thing well”: it took a country of subsistence farmers with a per-capita GDP of $184 in 1979 and turned it into a country of industrial workers with a per capita GDP of $12,700 in 2021. It is poised to deliver similar outcomes across the Global South. 

China has the “manufacturing muscle to wire the developing world”, and the result will be game-changing. Digital payments on cheap smartphones give marginalised people access to the financial system. They allow for the collection of sales taxes and help stabilise government finances. They also help suppress corruption and boost productivity. Little surprise, then, that perceptions of China in the Global South are “largely, often overwhelmingly, positive”. 

Western policy to restrain China has had scant effect on this “Long March into the Global South” – if anything, it has accelerated it. China’s economic domain is “expanding from the 1.4 billion people of the People’s Republic to a tightly integrated trading bloc of perhaps twice as many”, bound together by Chinese digital technology and physical infrastructure. This may be “the great economic event of the 21st century”, which the US has ceded to China by default. That may turn out to be the “biggest mistake” the West ever made.

Do anti-poverty programmes increase poverty?

 Sounds like a silly question until you dig a little deeper; there is some solid material here for evaluation points:

Still Failing to Learn the Lessons of Antipoverty Programs

Gary M. Galles 

– December 30, 2023

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One of the lesser-known realities of the War on Poverty was that while poverty rates were falling substantially before it began, that progress came to an abrupt halt, fantastically, with its implementation. Without understanding this, people can remain blind to the lesson about how “fighting” poverty can undermine progress against it. And that may be particularly important to grasp now as, decades later, similar effects seem to be spreading to a far-larger population.

Before we turn to its current implications, we would benefit from reviewing explanations for how the War on Poverty failed. To my mind, the most insightful explanation comes from James Gwartney and Thomas McCaleb, in Have Antipoverty Programs Increased Poverty?

Gwartney and McCaleb discussed four ways incentives were worsened by those programs: through increased real benefits, increased implicit tax rates, decreased incentives to acquire and retain skills, and decreased incentives to avoid adverse lifestyle choices. Of particular importance today is their analysis of why the effects of such programs will be more adverse, both the longer they last and the younger are those impacted.  

The first mechanism is that “increases in the real value of benefit payments make dependency on the government even more attractive compared with the alternative of self-support.” That effect will be greater for younger workers, whose earnings potential is lower than older, more educated, and experienced workers.

The second mechanism arises because means-tested poverty programs reduce benefits as households earn more, imposing the equivalent of an additional income tax on increased earnings. And when the reality of multiple programs is factored in, that implicit tax rate can be very high — far higher than the highest official tax rate on earned income, and in some circumstances, well over 100 percent. Consequently, “Such high implicit marginal tax rates pose a significant disincentive to work for those individuals whose potential earnings are relatively low.” 

The third mechanism reduces skills, because individuals who have not used their skills for extended periods experience erosion in those skills. Not only does this worsen the longer such incentives persist, the effect is greater for younger workers because, “As transfers make dependency more attractive relative to work experience, schooling, and other forms of human capital investment, youthful recipients fail to develop skills that have in the past enabled the young to escape from poverty.” That is, it is not just that existing skills erode with disuse, but when disincentives mean skills are unlikely to pay off economically, the incentive to acquire those skills in the first place is also diminished. 

The moral hazard effect arises because substantial increases in government assistance can enable some to choose “a lifestyle that increases the likelihood of poverty.” And that incentive is more damaging to one’s productive life the earlier it begins.

Gwartney and McCaleb noted that there were hardly any adverse incentive effects on low-income families whose members were retired, and smaller effects on those of working age, the older they were. The effects were much more severe for younger people, particularly those not yet in the labor force, who were (or should be) in the skill-acquisition stage.

To test whether the data corresponded to their analysis, Gwartney and McCaleb went one step further. Rather than just looking at overall poverty rates, they looked at poverty rates broken down by the ages of the householder, to compare the magnitude of the consequences of the disincentive effects on younger low-income households compared to older low-income households.

The effects they found were significant. After the substantial decreases in poverty for all age groups before the War on Poverty began, both official poverty rates and poverty rates adjusted for in-kind benefits (not officially counted as income) for the elderly (for whom the disincentive effects are minimal), continued to fall dramatically, from 15.9 percent in 1968 to 5.5 percent in 1982. For the 45-54 age bracket, adjusted poverty rates fell from 6.7 percent in 1968 to 5.8 percent in 1975, rising thereafter to 8 percent. For the 25-44 age bracket, adjusted poverty rates only fell from 8.6 percent to 8.5 percent at first, but rose substantially after, to 12.3 percent in 1982. Finally, for the youngest group studied, householders under 25, adjusted poverty rates rose from 1968 on, from 12.3 percent in 1968 to 24 percent in 1982.

So how is this “old news” important to current news? There were huge increases in such disincentives both during the Great Recession and during the course of COVID-19 recovery and its associated government policies.

The real (after adjusting for inflation) level of government benefits increased because the duration of benefits for unemployment was substantially extended (to 99 weeks at their peak). For a period in 2020, the federal government added $600 per week to state unemployment benefits (in many cases, making those benefits not only greater than they would otherwise be eligible for but more than they could earn). Eligibility for Medicaid (MediCal in California) was significantly expanded, subsidies for Obamacare policies grew, and there were even rental abeyance programs that allowed many to remain in their homes rent free.

To the extent that assistance programs focus on lower-income families, those programs will add to what recipients’ cumulative marginal tax rate (as economists call it, although it is technically a cumulative marginal benefit reduction rate), and subtract more from what they get to keep in take-home pay from producing for others in markets. Phaseouts of Obamacare subsidies with income do the same thing. Even more striking are “eligibility cliffs” where substantial benefits (e.g., free Medicaid for a parent with small children, which is worth thousands of dollars) disappear entirely when a certain income level is reached. 

The incentive to let skills depreciate with disuse, and more importantly, not acquiring skills in the first place, proceeded primarily from restrictions and lockdown effects on employment opportunities and a host of educational policies under COVID, from ineffective online instruction to grade inflation that undermined potential employers’ ability to differentiate between students with particular skills and those without them. Efforts to leave traditional public schools and the disincentives they produced were also hamstrung by attacks on charter schools and voucher proposals.

Many COVID-induced changes taught students the wrong lifestyle-choice lessons, as well. Rules often lost all meaning. Cheating exploded, with virtually no enforcement against it. Students learned that absenteeism carried no penalty, in contrast to the serious penalties the “real world” can impose on its practice. They learned to expect a level of coddling that meant almost every failure to do one’s work was excused, and virtually nothing they could do would earn them a failing grade on anything, much less get them kicked out of school. 

In sum, it seems like our failure to recognize what Gwartney and McCaleb did almost four decades ago — just how seriously the adverse effects of our efforts to “help” people hurt them instead — has come back to haunt America with a vengeance. We have recently doubled down on more of the same types of policies, which means we will see even more of their adverse effects. 

That has certainly left us in a bad place in many ways. But that does not mean we should give up, acquiescing to an unacceptable status quo. We still have time to recognize that “better late than never” reforms give us a chance to move upward as we go forward from where we are. As Gwartney and McCaleb concluded:

The current system of income transfers confronts the poor with perverse incentives that discourage self-help efforts in the short run and induces recipients to make decisions that retard their ability to escape poverty in the long run…The problem of poverty continues to fester not because we are failing to do enough, but rather because we are doing so much that is counterproductive.