Is Global Capitalism Increasing Poverty?

A few days ago on Twitter, Nathan Robinson made the claim that global capitalism wasn’t reducing poverty. In fact, it appears that poverty, using the threshold of $10/day (rather than the usual lower numbers) has increased from 1981 to 2017:

While there were a lot of critical responses to him on Twitter, he’s not wrong about the data: in 2017, there were 1.3 billion more people living on less than $10 per day (we’re going to assume in this post that the underlying data is basically correct, and correctly adjusted for inflation and purchasing power). It’s also true that at lower thresholds, such as $1.90 and $3.20, the absolute number of poor people has declined. And as a proportion of the world population, fewer people are under $10 per day. But in absolute terms there are more people under $10 per day. And not just a few: over a billion! There are also a lot more people above $10/day in the world than in 1981 (1.7 billion more!), but I agree that we should be concerned if there are more poor people too.

So how should we think about these numbers? Here’s what I think is the fundamental problem with Robinson’s claim: he asserts that the entire world has experienced something called “global capitalism” during this time period. But there has been considerable variation in the extent to which countries have experienced something we would call “capitalism,” and the degree to which it has increased in the past 40 years (I wrote a series of Tweets on this too).

The easiest way to see this is to break down that 1.3 billion people into different countries. Where were the biggest increases? Also, did any countries experience decreases in poverty? (Spoiler alert: YES!)

First, let’s look at the countries with the largest increase in the number of people below $10/day. The data comes from the excellent Our World in Data (though the underlying source is PovcalNet), and I compare the numbers between 1981 and 2017. Many countries have data up to 2019, but I stick with 2017 so we can break down that 1.3 billion. Here are the countries with the largest absolute increases in the under $10/day population:

  • India: 558.1 million
  • Pakistan: 115.3 million
  • Nigeria: 114.1 million
  • Bangladesh: 72.3 million
  • Indonesia: 72.3 million
  • Ethiopia: 68.0 million

Between those 6 countries, we have 1 billion more people living under the $10/day threshold. But wait! There are countries at the extreme opposite end, which saw big decreases in poverty by this definition.

  • China: 276.9 million
  • Russia: 26.7 million
  • South Korea: 25.1 million
  • Ukraine: 21.2 million
  • Thailand: 16.4 million
  • Japan: 13.9 million

Between these 6 countries, we have almost 400 million fewer people in poverty from 1981 to 2017. Of course, these are most big countries. If we did the list in percentage terms, we’d get different lists. Georgia and Ivory Coast had the biggest percentage increases (over 300%!) while Cyprus and Taiwan had the largest decreases (almost 100%!), but we’re trying to understand that headline 1.3 billion people.

So, of our list of 12 countries (6 increases, 6 decreases), which of these countries experienced the most “global capitalism.” There is no perfect way to measure this, but I think one of the best measures is the Fraser Institute’s Economic Freedom of the World index. The index scores countries in five categories and averages them to give an overall score of economic freedom. Again, while this is not a perfect measure of “global capitalism,” I think it’s the best we have.

We can look at the index in two ways. First, what are the current levels of economic freedom in these countries? Second, how much has economic freedom increased or decreased from 1981 to 2017? The index allows us to make both of these comparisons, though we’ll have to use 1980 since early versions of the index came in 5-year intervals. Unfortunately, we have to throw out one from each category (Ethiopia and Ukraine) because data isn’t available in 1980.

Here’s my attempt to summarize the EFW index data for these 10 countries. The shaded countries are the ones with big increases in poverty from 1981 to 2017.

I’m not sure if this data resolves much. Japan and South Korea clearly have the highest economic freedom, and also had big decreases in poverty. But China is towards the bottom of the list, and also had a big decrease in poverty. Bangladesh and Pakistan are at the bottom of the list (“low levels of capitalism,” one might say), but Indonesia and Nigeria seem to be a puzzle. Also, China and India have similar levels of economic freedom, and similar changes from 1980, but their poverty levels went in the opposite direction. What the heck is going on?

First, I think China and Russia are the clearest cases for countries that moved towards what we might call capitalism since 1980. They both clearly had command economies in 1980. Today, while we wouldn’t call either one models for capitalism, they are just so clearly closer to “ideal capitalism” than they were in 1980.

Perhaps we can rephrase Mr. Robinson’s question this way: why did Japan and South Korea see big decreases in poverty, while Indonesia and Nigeria saw big increases? And how does this relate to what we call “global capitalism”?

The key might be looking at more of the details of the Economic Freedom index. Specifically, what I would consider the most important category: the legal system and property rights. These are the key aspects of what most of us would call capitalism. It’s nice to have free trade, but if you don’t have secure property rights, you don’t really have what most of us would call “capitalism.” The EFW index measures the legal system and property rights in an interesting way: it comes from surveys of how well people think these institutions are functioning in a country! But really, that’s what is important: if people have confidence that property rights are secure, then they basically are.

To answer my questions above, South Korea and Japan clearly do well on the legal system and property rights category. Their scores of 6.6 and 7.6 put them in the top quartile of countries. Japan even beats the US! Nigeria and Indonesia fare much worse: 3.8 and 4.9 in 2017, placing them in the bottom quartile of countries. So, while Nigeria and Indonesia have made movements towards “global capitalism,” and now have middling overall EFW scores, they are still missing the key elements of what allows capitalism to function properly.

Let me try to sum all this up. Has poverty by Mr. Robinson’s preferred threshold fallen in some countries? Yes! Has it fallen everywhere? No! But one of two key factors seem to be driving the places with big decreases in poverty: 1. a clear movement from a command economy to a market economy; or 2. well-functioning legal and property systems. Russia, China, and Ukraine clearly benefitted from condition #1. Japan and South Korea clearly benefitted from #2.

None of the countries with big increases in poverty are command economies today, so they can’t really benefit from option #1. This leaves the possibility of option #2, improving their legal and property institutions. Easier said than done! But that does seem to be the important factor. I’m not sure if Mr. Robinson would approve of these conclusions, but that seems to be what the data suggest.

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