RSS

Escaping Extreme Poverty: An Economics Student Point of View

09 Aug

In 2015, the World Bank purposed a goal of eradicating extreme poverty by the year 2030. Now that 2030 is approaching, it is time to reflect on the goals of the World Bank and determine if this goal has been met. Was this goal realistic? If the World Bank eradicated extreme poverty, how was it accomplished? If the goal was not achieved, what prevented it from being accomplished? Utilizing the economic way of thinking provides humble and valuable insights to these important questions.

If we employ the economic way of thinking, we will understand the goal of eradicating extreme poverty cannot realistically be achieved by a bureaucratic organization such as the World Bank. However, extreme poverty may be alleviated through unconstrained access to free markets. Bureaucratic organizations are plagued with perverse incentives and inefficiency. Also, it is impossible for the World Bank to know the values of individuals entrapped in extreme poverty. Worse, individuals receiving assistance have minimal channels to relay feedback to the World Bank, a systemic problem associated with top-down planning.

The employees of the World Bank face perverse incentives to make over-ambitious goals in order to earn approval and recognition, an incentive that is exemplified by the objective of eradicating extreme poverty by 2030. The individuals who purposed this objective will receive praise for such well-intentioned, noble ambitions. However, in 2030 these individuals will not be held accountable when their over-zealous goals fall short and are plagued with unintended consequences, a symptom of the planner’s problem. The real victims of this systemic dilemma are the individuals suffering in extreme poverty who receive assistance that may decrease their standard of living, assistance that was intended to raise their standard of living.

Genuinely humanitarian, well-intentioned actions can inflict unintended adverse consequences on impoverished individuals. A relevant example of this dilemma is demonstrated by developed countries donating medical equipment to developing countries. While the idea of donating medical equipment seems altruistic, when applying the economic way of thinking, it may not be ideal for assisting impoverished individuals. For instance, the hospital workers may not have appropriate training to work the medical equipment, or they may lack access to the necessary complementary goods to maintain operational machines (e.g., batteries). These medical machines that were a valuable product to developed countries become a negative externality to impoverished countries, as unusable machines occupy scarce space that could be used for additional patients. As noted by Laura Blue (2012),

If they have secondhand or excess medical equipment, many donors assume that, as long as it’s in good condition, it can be useful in settings that lack the equipment — not realizing that lack of resources can extend to basic infrastructure needed for operation. (Report: Why 40% of Donated Medical Equipment Goes Unused in Poor Countries, para. 4)

This exasperates the suffering of impoverished individuals while the central planner’s intention is humanitarian assistance and alleviation of suffering. This epitomizes the planner’s problem, and exemplifies the harm that is generated from top-down planning and disregard for the values of impoverished individuals.

Eradicating extreme poverty will require bottom-up development and more importantly, the ability to immigrate freely. By moving to a developed country with strong institutions, supported and reinforced by government, individuals experiencing extreme poverty can raise their standard of living by multitudes. They may also raise the standard of living of their extended families’ through remittances, which have been proven to have a greater impact than foreign aid. Remittances facilitate bottom-up development, allowing impoverished individuals to allocate remittances to their highest value return. Countries plagued with extreme poverty typically suffer from corrupt governments that prevent institutions from being established and hinder bottom-up development. By preventing individuals from leaving poverty-plagued countries, it sustains the number of individuals subject to government extortion, potentially propping up parasitic governments and facilitating extreme misery and poverty.

An empirical example highlighting the power of immigration is illustrated by the recent Haitian earthquake; the United States Government adopted a policy that granted “Temporary Protected Status” (TPS) to Haitian immigrants. According to Dilip Ratha (2010),

Haiti receives between $1.5-1.8 billion in remittances each year (some estimates are even larger, over a half of its national income). If the TPS resulted in a 20 percent increase in the average remittance per migrant, we would expect an additional $360 million remittance flows to Haiti in 2010! What is more, if the TPS were to be extended once beyond the currently stipulated 18 months… additional fund flows to Haiti would exceed a billion dollar over three years. (Helping Haiti through migration and remittances, para. 2)

It is this type of policy that will help end extreme poverty, a policy the World Bank has little responsibility in constructing. However, the World Bank recognizes the benefits of immigration and the superior amount of wealth generated by free markets relative to humanitarian assistance. Instead of allowing the free transportation of capital (e.g., medical equipment), the World Bank should sanction the free flow of labor to alleviate the suffering experienced by individuals in extreme poverty.

Another key to reducing extreme poverty is increasing economic freedom. Poverty is a basic state of nature and is alleviated through production. The end goals should be to empower individuals in poverty to determine their own values and take control of their lives, not to enforce a theory of what their values ought to be. It is necessary to restrict government involvement in social wealth transfer programs and return the responsibility to private individuals and charities. Henry Hazlitt  rightfully proclaims (1970),

The solution to our problems is not more paternalism, laws, decrees, and controls, but the restoration of liberty and free enterprise, the restoration of incentives, to let loose the tremendous constructive energies… (p. 220)

When individuals are empowered by economic freedom, they find the most efficient manner to increase their output and maximize their value.

References

Blue, L. (2012, August 06) Report: Why 40% of Donated Medical Equipment Goes Unused in Poor Countries. Time Magazine. Retrieved from http://healthland.time.com/2012/08/06/report-why-40-of-donated-medical-equipment-goes-unused-in-poor-countries/

Hazlitt, H. (1970) Man vs. The Welfare State. New Rochelle, NY: Arlington House.

Ratha, D. (2010, January 19). Helping Haiti through migration and remittances. The World Bank. Retrieved from http://blogs.worldbank.org/peoplemove/helping-haiti-through-migration-and-remittances

 
Leave a comment

Posted by on August 9, 2015 in Uncategorized

 

Tags:

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google+ photo

You are commenting using your Google+ account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s

 
%d bloggers like this: