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john birchall

Poverty

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Those interested in politics might like to give some thought to the dilemmas posed in this brief analysis of how we tackle the growing division betwen the rich and the poor world.

Letter from an Economist - 23rd February 2004.

I am beginning this edition sat in the foyer of a rather nice hotel in Brussels. Outside several doormen are busy calling taxis to take business people around this bustling city. This morning I walked just a few hundred yards, sorry metres, behind the hotel looking for a newspaper shop. Suddenly, I was in one of the seediest places I have seen for many years and there in front of me were young men encouraging male passers by to make use of the 'assets' they controlled within many of the surrounding buildings. The contrast was very difficult to accept. Back in the hotel BBC World TV informed me of the growing debate regarding what to do with a sudden influx of economic migrants that might arrive post the EU expansion to twenty five members in May of this year. My brief visit to what lay just behind the back the hotel had allowed me to buy a copy of The International Herald Tribune. Within this respected journal was an article on Gordon Brown's recent proposals for addressing poverty and within it were a number of interesting points that started me thinking. My schedule did not allow immediate action on the stimulus given by The Chancellor's thoughts and soon I was listening to a lecture on EU Regional Policy and its main targets. Naturally, the official charged with informing us of the apparent success of this programme selected his data with care and told of how Ireland, Spain etc had been relatively poor countries prior to their respective entries to the EU and that they were now ahead of the mean income of the entire community. This, in his opinion had been achieved by:

* not spending nearly as much as many sources suggest the EU does - the entire budget is just one percent of the gross national income of all member States

* focusing on investment and not income led programmes, such as unemployment pay

* planning for seven year budgets and not annual negotiations with national treasuries

* Not having to satisfy political cycles and their need for short-term, voter attractive schemes

Put in economic language the EU has followed an interventionist approach and feels that it has been successful. Now, one could argue that an organisation created mainly by those with a centre-left agenda would align them to such a policy but it is interesting to note how many new countries want to receive these injections to their economies. Many lived for nearly half a century with forced intervention as the principal feature of all policy creation and application, yet they want to sign-up to a system that is essentially non free market but business friendly.

Now, one of my briefs when writing these weekly meanders through all things economic is to promote exchanges of ideas through the EU Virtual School Community, my own site and its discussion forum and The Education Forum. So, let's look at how the poorer nations of this planet might break out of the vicious cycle of poverty. Some of you might think that such a topic is not really going to affect you but think about:

* Immigration and all its possible implications

* Yet more TV documentaries showing emaciated women struggling to feed their listless child

* The moral and ethical problems that will infiltrate our teaching if we continue to get richer whilst others blatantly do not

To encourage debate I have quickly outlined some other ideas that are currently 'doing the rounds' in economic circles.

The free market approach

This is very much the US way of doing things and those of you tracking the Presidential Election might like to look at Dean's domestic agenda and see how quickly that has been 'watered down' by those who have defeated him in the primaries. I don't think he openly addressed world poverty but his health reforms have sent shivers down the spines of the middle classes and engaged many young, first time voters. Now, the US favours allowing capital to flow in search of profit and quite large amounts arrive on the US-Mexican border. Here it builds such essentials as washing machines. In a recent ITV documentary the interviewer asked the manager of the Whirlpool plant if his workers could afford to buy what they built. His answer was more honest than one might have expected, for he suggested that such consumer durables require water, electricity and systems for waste disposal. None of these were available to his workers.

The libertarian school

For me the most interesting writer in this school of thought is Johan Norberg. This young Swedish 'radical' thinker has been kind enough to write a short piece for me on how Sierra Leone might seek economic growth. Put simply he sees property rights, the rule of law and the introduction of land reform and accountable and transparent government as the major prerequisites of any development programme. He also suggests that MNC's can be the catalysts for domestic growth and improvements in living standards both for those employed by these organisations and those working for domestic concerns that want to keep a stable and satisfied workforce.

The debt school of thought

The Jubilee Group used the year 2000 to push for the eradication of most of the debts owed by developing countries to both private banks and government programmes. They felt that this would release resources, build confidence and possibly attract back some of those lost in the 'brain drain' that has robbed many developing countries of their most productive citizens.

So, we have in front of us an all too brief outline of just some of the possible routes out of poverty. Before closing and inviting you to comment on how you would address such huge problems let's just look for a few minutes at the economies that between them include one third of the world's population. I refer to China and India.

When I first became interested in development economics the disparities in income distribution between the rich and poor was, in my opinion, obscene. I watched with interest as countries such as Malaysia and Singapore leapt forward in economic terms. These small nations recorded enormous growth figures but global data was always pulled down by China, India and most of sub-Saharan Africa. Today, the first two who once deflated the average growth rates of the planet are beginning to record similar numbers to those previously posted by many of the Tiger economies. How has this happened? Well, liberalisation of domestic markets and the reduction in barriers to foreign capital flows have obviously played a large role in what is now becoming the first economic success story of this century. Now, one of my age knows that rapid economic growth can increase the anomalies of income distribution within a country but at least the creation of economic wealth allows funds to be available to tackle such inequalities. Whatever ones previous ideas it is difficult to argue that foreign direct investment has been a major driver behind the growing success of the markets that attempt to feed etc 2.3billion people. The other possible growth stimulant factor that seems so often to be missed is that of foreign education and how this adds value to the young people who receive it. Those fortunate to travel to the US, UK, Australia etc return with new ideas and a desire to put these into practice in the domestic business sector. The Chinese experiment is older than that of the Indian equivalent and seems to be more dependent on foreign capital than India's. However, the latter is forging ahead in IT as graduates return from the west coast of the US and open new businesses. For many who make such huge journeys to far-off lands their immediate post graduation period is spent earning money in their adopted country. Much of this money is sent back home and used to save and invest in the business fabric that they will one day return to manage and develop.

For some of you I maybe am appearing to change my spots and to suddenly be a supporter of global capitalism as the only way forward. Let me lay to rest this charge. No, I too suspect some, if not many of the motives of the global brands but monies repatriated to China and India are not used to buy ready-made consumer goods, no they are invested in the products of local manufacturers. The multiplier effect is greater than when huge sums are given to the public sector to distribute.

Alas, one cannot export the experiences of one country to another - a one size fits all approach simply does not work. But in our deliberations perhaps we can address the old topic of ' is top-down better than bottom-up' when addressing the problems posed by development? Do human beings react best when being told what to do, or do they actually know what is best for their own economic, social and political environment?

Perhaps the experts need to come out of their ivory towers in New York, London, Paris etc and ask those at the bottom of the economic pyramid how they have started to record very the growth rates that others have long suggested they should. All too often those who have thought that they knew best have gone away wringing their hands and suggesting that millions of people are always getting it wrong!!

Over to you - I look forward to discussing this brief tour through the largest single problem facing us all with those who can afford a few minutes on the 'information super highway'.

So, let's hear from those who log onto Triple A Learning, or The Education Forum, The Virtual School and the other places in which these 'Letters' appear.

John birchall

www.johnbirchall-economist.net

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