How's the Third World Doing?

Market Reforms Produce Stunning Improvements in Living Standards

The Third World is in trouble. Standards of living are plummeting, while the West is getting richer. Nearly everyone seems to believe it. The left wants to believe it as a justification for global socialism. Racists want to believe it because it “proves” the superiority of the white race. The media think it’s a good story and promote it constantly, leading the vast majority of the public to believe it.

But is it true?

In the litany of reasons given to justify foreign aid, one that is meant to emphasize the poverty of the underdeveloped world is the slogan that some significant percentage of the world’s population lives on less than a dollar a day. The first thing that comes to mind is, how does anyone know this? Second, is it significant? What does it mean?

One problem with the slogan is that the dollar isn’t what most people think of as a dollar. The World Bank bases the standard on the 1985 dollar, which was worth more than $1.65 in 2001 dollars.

Moreover, a dollar in London or New York is not the same as a dollar anywhere in the Third World. Everyone knows you can buy a lot more housing for a dollar in Peoria than in San Francisco. The differences in purchasing power are far greater in the Third World. Having lived in Africa for over a decade, I can attest that one dollar goes a long way. (In South Africa, only 21,000 people out of 42 million earn more than $3,000 per month. The average “wealthy” family has an income close to around $10,000 a year.)

The United Nations Development Program (UNDP) uses the 1993 dollar but also considers purchasing power. It reports: “Between 1990 and 1998 the proportion of people living on less than $1 (1993 PPP [purchasing power parity] US$) a day in developing countries was reduced from 29% to 24%.”1 As this quotation indicates, fewer and fewer people are impoverished as time goes by.

Another statistic that is trotted out to prove things are getting worse in the Third World is per capita gross domestic product (GDP). How is this calculated? An estimate of the total economic output of a nation is divided by the number of people living in that nation. But that neglects an important fact about these economies: many of them are cash poor but labor rich. The value of human labor is not taken into account.

In the West a farmer tills his field using a tractor, which represents a substantial capital investment. But the Third World farmer tills a field with his labor. Hence one of the reasons for high birth rates in such countries is that children are seen as an investment in the future. In the First World the tractor is included in the GDP, while in the Third World the labor is not. In fact, very little of Third World investment in the form of labor makes it into the GDP statistics. There are many people who do not earn the cash equivalent of a dollar a day, yet they are accumulating wealth.

There are other problems with the notion of per capita income. Every time a child is born, per capita income falls. Yet each death increases it. If a huge portion of a population died overnight, the nation, on paper at least, would appear much richer. But would anyone say the people there were better off?

What precisely is happening in the Third World? According to the United Nations, World Bank, and myriad other groups that keep track, the standard of living is improving. The statistic that almost trumps all others is life span. People who find their conditions worsening don’t live longer lives. But life expectancy is consistently better in the Third World than a century or even half a century ago. In 1906 the life expectancy in India was 25 years;2 today it’s around 64.3 As recently as 1930 the average life span in China was only 24 years.4 Today it’s 69 for men and 73.5 for women.5

In The Skeptical Environmentalist, Bjørn Lomborg notes that in France in 1800 the average life span was 30 years; it was 45 years in Denmark in 1845.6 The vast majority of the Third World is doing much better than that. According to the United Nations, the worst region in this regard is Africa: it has an average life expectancy of about 51 years.7 The worst of the Third World today is about where France was in 1913.8 Africa’s life expectancy today is better than similar rates in the United States a century ago.9

A good deal of this improvement is due to the massive decline in infant mortality. The current average infant mortality rate in Africa is 83 per 1,000.10 That’s slightly better than it was in Sweden in 1900.

Not as Good as It Gets

This doesn’t mean things are as good as they could be. But things never are. Life is a process, and so is economic development. On average the Third World today is about where the Western world was at the turn of the last century. One interesting indication of this improvement is that the doomsday merchants at the United Nations have dramatically shifted the focus of their annual reports on the world’s population. In past years they concentrated on food, infant mortality, and life spans, particularly in light of a “population explosion.” The U.N. Population Fund’s State of the World’s Population 2001 played down all those issues and instead concentrated on long-term environmental “problems” like global warming. Projections of famine in the next few decades have been replaced by concerns about slight changes in the world’s climate over the next few hundred years.

Improving life spans and lower infant mortality would seem to indicate rising levels of wealth. That is exactly what is happening. World economic progress over the last two centuries has been nothing short of miraculous. The capitalist nations saw wealth expand 13 times in that period. Latin America expanded its wealth sevenfold, and even Africa had a fourfold increase in wealth.11 No wonder the U.N. has said that poverty worldwide has decreased more in the last 50 years than in the previous 500.12

For some, however, greater wealth doesn’t make up for inequality between the developed and developing worlds. For years the UNDP said inequality was increasing. But this judgment was based on exchange rates instead of actual purchasing power in different countries. Because richer countries have higher nominal prices, Lomborg says, the exchange-rate method produced “unreliable comparisons that will greatly exaggerate inequality.”13

Eventually the UNDP came to the same conclusion and abandoned this method. Its “Human Development Report 2001″ noted: “With the exchange rate measure, the ratio of the income of the richest 20% to that of the poorest 20% grew from 34 to 1 in 1970 to 70 to 1 in 1997. With the PPP [purchasing power parity] measure, the ratio fell, from 15 to 1 to 13 to 1.”14

The idea that the world is becoming more unequal is an important weapon in the arsenal of the egalitarian left. To support the thesis, egalitarians manipulate the facts. UNICEF and the Worldwatch Institute, for example, compare differences in income in straight dollar terms. For example, suppose you earned $500 a year and I earned $5,000, then two years later your income was $1,000 and mine was $6,000. In the first year I earned $4,500 more than you. In the second I earned $5,000 more. Some consider this evidence that income has become more unequal.

But in fact you doubled your income while mine only improved 20 percent. Surely our levels of inequality declined. In the base year you earned 10 percent of my income. In the comparison year your income was almost 17 percent of mine. That’s a dramatic reduction in inequality.

By most objective standards the Third World today is a much improved place. Besides the improvements already cited, educational levels are up and starvation is down. There is wider access to clean water and health care than at any time in history.

What Happened?

What explains this improvement? Since the collapse of communism in 1989 the world has gone through an ideological revolution. Central economic planning as a path to prosperity was discredited. The 2002 Index of Economic Freedom gives some indication of how this translated into policy changes in Third World nations. The Index rates the majority of nations on economic freedom going back to 1995. Of the nations rated, some 105 would be considered developing countries. Of those, almost two-thirds, or 65 of them, are more economically free today than they were in the past. In 23, economic freedom has declined, and in 17, it has remained about the same.15

Of course, to say that life is improving on average does not mean that things are improving equally for all people. Most of the economic progress in developing countries is taking place in a minority of the nations. Luckily those nations contain about 60 percent of the population of less-developed countries.

So why are 60 percent seeing major improvements in life while 40 percent are not? The integration of individual economies into a global free-trade regime has dramatically changed the world, and this improvement is most obviously seen in the standard of living for globalized Third World nations. According to the World Bank, 24 developing countries in particular have joined the globalization revolution, and most of the improvement in Third World economic conditions is limited to those nations alone.

The World Bank said:

Countries that strongly increased their participation in global trade and investment include Brazil, China, Hungary, India, and Mexico. Some 24 developing countries–with 3 billion people–have doubled their ratio of trade to income over the past two decades. The rest of the developing world actually trades less today than it did 20 years ago. The more globalized developing countries have increased their per capita growth rate from 1 percent in the 1960s, to 3 percent in the 1970s, 4 percent in the 1980s, and 5 percent in the 1990s. Their growth rates now substantially exceed those of rich countries. . . .16

The Third World is now divided between nations that have liberalized their economies and joined the global economy and those that cling to the outmoded economic policies of interventionism and protectionism. While the new globalizers are prospering, those that cling to the past are not just stagnating but declining. The average per capita growth in those countries was a negative 1.5 percent. The World Bank study noted:

The striking divergence between the more globalized and less globalized developing countries since 1980 makes the aggregate performance of developing countries less meaningful. However, since 1980 the overall number of poor people has at last stopped increasing, and has indeed fallen by an estimated 200 million. It is falling rapidly in the new globalizers and rising in the rest of the developing world. Non-income dimensions of poverty are also diverging. Life expectancy and schooling are rising in the globalizers–to levels close to those prevailing in rich countries around 1960. They are falling in parts of Africa and the FSU [former Soviet Union].17

There’s good news even in the bad news: If the developing countries that are declining are doing so because of bad policies, a shift to market reforms will produce the same stunning improvements we see in the new globalizers of the Third World.


Notes

  1. Sakiko Fukuda-Parr et al., Human Development Report 2001 (New York: Oxford University Press, 2001), p. 22, emphasis added.
  2. Bjørn Lomborg, The Skeptical Environmentalist (New York: Cambridge University Press, 2001), p. 51.
  3. United Nations Population Fund, State of the World Population 2001 (New York: United Nations Population Fund, undated), p. 68; www.unfpa.org/swp/swpmain.htm.
  4. Lomborg, p. 51.
  5. State of the World’s Population 2001, p. 67.
  6. Lomborg, p. 50.
  7. State of the World’s Population 2001, p. 67.
  8. Julian Simon and Herman Kahn, eds., The Resourceful Earth (New York: Basil Blackwell, 1984), p. 51.
  9. Lomborg, p. 53, where he notes that in 1900 the life expectancy of a newborn American girl was 48, three years less than in Africa today.
  10. State of the World’s Population 2001, p. 67.
  11. Lomborg, p. 71.
  12. U.N. Development Program, “Human Development Report” 1997, http://hdr.undp.org/reports/global/1997/en/default.cfm.
  13. Lomborg, p. 74.
  14. “Human Development Report,” p. 20.
  15. Gerald P. O’Driscoll, Jr., Kim R. Holmes, and Mary Anastasia O’Grady, 2002 Index of Economic Freedom (Washington, D.C.,: Heritage Foundation, 2002).
  16. World Bank, Globalization, Growth, and Poverty (New York: Oxford University Press, 2002), p. 5.
  17. Ibid., p. 7.