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Monday, September 18, 2017

What Most Americans Don’t Know about Extreme Poverty

We have seen dramatic changes in poverty in recent decades.

766,010,000 people.

That’s how many are living in extreme poverty today, defined by the World Bank as having roughly $2/day or less in current US purchasing power. Think about that number: seven hundred and sixty-six million, ten thousand human beings.[1]

In just one generation, the number of folks not in poverty has doubled.

That’s a lot of people in poverty! It’s roughly double the population of the United States, all at a standard of living we in the USA cannot really imagine. Isn’t it unconscionable that so many live in poverty when we live in such affluence?

But here’s another number: 6,412,820,000. That’s the number of people who are not living in extreme poverty. And that’s great! Not only is it great, that number has roughly doubled since 1987. In just one generation, the number of folks not in poverty has doubled. (For more on poverty under capitalism, see “Extreme Poverty Rates Plummet Under Capitalism.”)

Now to be fair, not being in extreme poverty does not make one Bill Gates. Some of those 6.4 billion people are just above that extreme poverty line. If we bump the line up to about $3/day, about 1 billion more people fall under it. And now, perhaps you have been thrust back into your normal state of pessimism.

But fear not, dear reader, there is cause for optimism. As Max Roser, guru of international data on poverty (and everything else), explains in a recent data-driven essay, you can take your pick: $1, $2, $3, even $10 per day. Global poverty has been declining under all of those thresholds.

What Changed? Consider China

Enough of this data. Let’s get to the science. Why did poverty decrease so much over the past 200 years, and especially over the past 30 years? Let’s look at one key example; then we’ll zoom out to the broader research to make sure we aren’t cherry-picking.

Until recently, China was home to almost half of the world’s poor.

China is the natural place to start. It’s the world’s largest country and, until recently, the home of close to half of the world’s poor. According to the World Bank’s estimates, in 1981 over 88% of people in China lived in extreme poverty. At the time, that was about 878 million people, which you may notice is about 100 million more than the number for the entire world in 2013! After 1981, extreme poverty fell rapidly in China – to 61% in 1987, 41% in 1999, 15% in 2008, and just 1.85% in 2013. Amazing!

No comparable poverty data for China exists prior to 1981, but the percentage of people in extreme poverty was likely close to 88%. Prior to 1981, China had roughly the same real income level per person as it did in the 19th century, with no real change until the 1980s.

What changed around this time? Prior to the 1980s, China was living under communism, which means many things but most importantly the lack of property rights. Starting in a small way in the late 1970s, and then gradually throughout the 1980s, China began to recognize private property rights, as well as other aspects of economic freedom.

One attempt to measure economic freedom (which includes not just property rights but also taxes, tariffs, regulations, and more) is by the Fraser Institute. Their first estimate of economic freedom for China in 1980 gave China a score of just 3.6 out of 10. Slowly but surely China’s score increased almost 3 full points on the 10 point scale, to almost 6.5 out of 10 today.

As the poverty data show, the poor were definitely not left behind.

China’s economy grew dramatically over this period, as did average incomes. And as the poverty data show, the poor were definitely not left behind. Those 878 million people in extreme poverty in 1981 in China? By 2013 it was only about 25 million.

China’s decline in poverty is dramatic, but are the results typical? Perhaps not in size, but the general story holds true in other countries. Research published by the Fraser Institute found that for every 1 point (on that 10-point scale) higher a country’s economic freedom score was in 1980, extreme poverty fell by about 4 percentage points over the next 25 years. Additionally, for every 1-point increase in economic freedom after 1980, a country’s extreme poverty rate fell by another 4-5 points.

Poverty is Declining but No One Knows

Other academic research on economic growth, closely related to poverty, also finds that the level and change in economic freedom is correlated with growth.

Sorting out causation is always challenging. But let’s circle back to the first point: poverty, by just about any measure, has declined worldwide in recent decades. Whatever the reasons, this is an extremely important recent historical fact.

Now that you know this fact, you are among the elite in the world.

Now that you know this fact, you are among the elite in the world, at least on this one important topic. When asked in surveys what has happened to global poverty in the past 20 years, only 1% of those surveyed worldwide knew it was cut in half! Another 12% thought it had declined by about 25%, but 18% thought it had stayed the same and 70% thought it had increased!

Before you get too smug, please be aware that there were large differences across countries in knowledge about global poverty reduction. While overall 13% knew that poverty had declined, this figure was as high as 50% in China and 27% in India, but only about 8% in the US and Germany.

This difference between countries is probably partly due to “availability bias,” where people tend to use readily available examples to extrapolate to the whole population. But it’s also likely a result of “pessimistic bias,” which Bryan Caplan uses as one of his four main biases affecting voter knowledge in democracies.

In other words, people in China know that poverty is declining, because it really is declining rapidly in their country and most Chinese people know it firsthand. In the US, pessimism dominates, perhaps due to the long shadow of the Great Recession. The good news for you? By reading this article, you now know more than over 90% of Americans!

As we have seen, the decline in poverty has been dramatic across the world in recent decades. Based on this, we can perhaps ask a better question: Why aren’t there even more people in poverty? The answer has a lot to do with economic freedom, and the large increases in economic freedom in recent decades around the world.

[1] The data are from 2013, the latest available.

Reprinted from Learn Liberty.

  • Jeremy Horpedahl is an assistant professor of economics at the University of Central Arkansas, where he teaches principles of microeconomics and public finance. He is also an affiliated scholar with the Arkansas Center for Research in Economics. He has published several research papers and policy briefs with Mercatus on the federal and state tax systems.