Capitalism and Poverty

In Kevin Hassett’s National Review article “The Poor Need Capitalism,” he points to a new NBER study, “Parametric Estimations of the World Distribution of Income,” and writes:

The chart [below] draws on a landmark new study by economists Maxim Pinkovskiy and Xavier Sala-i-Martin. The authors set out to study changes in the world distribution of income by gathering data from many different countries. As a byproduct of their work, they are able to count the number of individuals who live on $1 per day or less, a key measure of poverty.

According to their calculations, the number of people living in poverty so defined has plummeted, from 967,574,000 in 1970 to 350,436,000 in 2006, a decrease of a whopping 64 percent. Whence the reduction? The biggest factor is the emergence of middle classes in previously poverty stricken China and India. And the spread of capitalism to other countries has similarly been followed by prosperity. The trend is even more impressive if one considers that the world population skyrocketed over that time, increasing by 3 billion.

If the trend continues for just 40 more years, poverty will have been essentially eradicated from the globe. And capitalism will have done it. There are those who have argued that the current financial crisis has served as proof that capitalism is a failed ideology. The work of Pinkovskiy and Sala-i-Martin suggests that there are about a billion people whose lives prove otherwise.

The NBER paper also finds that the world poverty rate fell by 80 percent, from 26.8 percent in 1970 to only 5.4 percent in 2006 based on the $1 per day poverty measure (see chart below).

The study also estimates poverty rates separately for five geographical regions (see chart below), with some pretty amazing results for East Asia (China, Taiwan, and S. Korea), which in 1960 had the highest regional poverty rate in the world by far, at 58.8 percent, compared to 39.9 percent for Africa, 11.6 percent for Latin America, 8.4 percent for MENA (Middle East and North Africa), and 20.1 percent for South Asia. In the 36-year period between 1970 and 2006, the poverty rate in East Asia fell to only 1.7 percent, which is now below all of the other regions: Africa (31.8 percent), Latin America (3.1 percent), MENA (5.2 percent), and South Asia (2.6 percent). Bottom Line: The 80 percent decrease in the world poverty rate between 1970 and 2006 has to be the greatest reduction in world poverty in such a short time span ever in history, and the 97 percent reduction in the poverty rate of East Asia (from 58.8 percent to 1.7 percent) has to be the most significant improvement in a regional standard of living in history over such a short period. Thanks to Hassett for pointing out that capitalism is alive and well, and is spreading around the world helping to eliminate poverty.