Transcript Property Rights and the Rule of Law

Introduction:
“What Is Poverty and Who Are the Poor? ”
1 Billion People Live in “Extreme Poverty”
World Bank
1,400,000,000
1,000,000,000 $1.00/day
World Bank 2010
$1.25/day
Economic Terminology
•
•
•
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Income
Wealth
GDP (Gross Domestic Product)
Per capita GDP
Why do we use GDP to measure poverty?
Economic Terminology
• Absolute Poverty – measured against a designated
minimum threshold of material well-being. The
incomes of the poor fall below the minimum
threshold.
– Current standard = $1/day PPP
• Relative Poverty - identified by comparing levels of
material well-being experienced by different
individuals or groups, rather than by comparing the
level of well-being to a standard.
Poverty Can Be Measured by Either Output (GDP)
or Consumption
Consumption Measure of Number of Poor by World Region
Regions
20005
2008
332 million
284 million
6 million
2 million
Latin America and the
Caribbean
48 million
37 million
Middle East and North
Africa
11 million
9 million
South Asia
598 million
571 million
Sub-Saharan Africa
395 million
386 million
Total
1.39 billion
1.289 billion
East Asia and the Pacific
Eastern Europe and Central
Asia
Reduction
in number of poor, 2005-2008: 101 million
Sources: World Bank Poverty and Inequality
http://www.worldbank.org/Data/Views/Reports/TableView.aspx (May 1,2012
Countries of the World;
Low, Middle and High Income
The number of extreme poor has
declined by 500 million
since 1981
Share of World Population in
Poverty, 1820 – 1998 ($1/day)
World BankDavid Dollar, Development Research Group, World Bank. “Capitalism, Globalization and Poverty.” unpublished
paper, written for The Foundation for Teaching Economics, March, 2003, p. 27
Number of People Living on Less Than $1
Per Day, 1820 - 1998
1980
World BankDavid Dollar, Development Research Group, World Bank. “Capitalism, Globalization and Poverty.” unpublished
paper, written for The Foundation for Teaching Economics, March, 2003, p. 27
World Bank 2009
• ..\..\..\Videos\RealPlayer Downloads\Hans
Rosling's 200 Countries, 200 Years, 4 Minutes
- The Joy of Stats - BBC Four.flv
Height Is a Proxy for Economic Well-Being
~1750
Years of Life Expectancy at Birth
Select Years
1950-55
1975-80
2005-10
~30 (1800)
66
74
81
~36
(1799-1803)
69
73
79
India
25
(1901-11)
39
53
64
China
25-35
(1929-31)
41
65
73
38
48
51
46
60
67
Place
Middle
Ages
France
UK
20-30
Africa
World
20-30
Sources: Lee and Feng (1999); Peterson (1995); Wrigley and Schofield (1981, 529); World Resources Institute (2011);
UNDP (2002) http://hdr.undp.org/statistics/data/indic/indic_1_1_1.html
Real Gross Domestic Product Per Capita
(1990$ International PPP)
Area
1000
1500
1700
1820
1952
Europe
$400
~$640
870
1,130
4,370
USA
600
1,260
10,650 23,380 27,948
India
530
530
610
1,570
1,957
540
3,200
3,583
1,220
1,489
5,190
6,049
China
450
600
600
600
Africa
400
400
400
400
World
420
550
600
670
2,270
Sources: Maddison (1998, 1999)
Development Centre Studies The World Economy: Historical Statistics, Maddison, 2003.
1995
2001
13,950 19,256
Real Gross Domestic Product Per Capita
(2005$ International PPP)
1995
2001
2007
2010
Europe
$24,674
28,364
30,789 29,765
USA
33,903
39,602
41,260 40,650
India
1,452
1,832
2,685
3,240
China
1,849
2,868
5,239
6,810
Africa
1,498
1,589
1,914
2,022
World
7,037
7,955
9,535
9,869
Sources: Maddison (1998, 1999)
Development Centre Studies The World Economy: Historical Statistics, Maddison, 2003.
The Good News and The Bad News
Number of People Living on Less than $1.25/day
(millions)
1981
1990
1999
2005
2008
East Asia &
Pacific
1,096
926
656
332
284
Sub-Saharan
Africa
205
290
376
395
386
Source: World Bank Poverty and Inequality Database
http://databank.worldbank.org/Data/Views/Reports/TableView.aspx (April 30, 2012)
Poverty has declined according to China’s and
India’s poverty lines
Millions of people
India
300
China
200
100
0
1977-78
1987
1993
1999
David Dollar, Development Research Group, World Bank. “Capitalism, Globalization and
Poverty.” unpublished paper, written for The Foundation for Teaching Economics, March, 2003, p. 24.
What does
Capitalism
have to do with
Poverty?
Measurement: Fraser Institute
Economic Freedom:
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Size of government and taxation
Protection of private property and the rule of
law
Soundness of money
Trade regulation and tariffs
Regulation of business, labor and capital
markets
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Background:
Economic Freedom Project
• 25 year project
 Transparency is a highly valued part of the project
• Based entirely on third party data from World Bank, International
Monetary Fund (IMF), Global Competitiveness Report, etc.
(based on both objective and survey data)
 We rank 141 countries representing 95% of the world’s
population according to the extent to which they permit their
citizens to be economically free
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Per Capita Income and Economic
Freedom Quartile
GDP Per Capita
(ppp), 2009
$35,000
$30,000
$25,000
$20,000
$15,000
$10,000
$5,000
$0
Most Free
Quartile
2nd Quartile
3rd Quartile
Least Free
Quartile
Most Free ……………. Least Free
Sources: The Fraser Institute; The World Bank, World Development
Indicators,
2011
Overall Economic Freedom Index: Top Ten
Hong Kong
Singapore
New Zealand
Switzerland
Australia
Canada
Chile
United Kingdom
Mauritius
United States
0
2
4
6
Score (out of 10)
Source: The Fraser Institute 2011.
8
10
Overall Economic Freedom Index: Bottom Ten
Chad
Burundi
Congo, Rep. Of
Guinea-Bissau
Central Afr. Rep.
Congo, Dem. R.
Angola
Venezuela
Myanmar
Zimbabwe
0
2
4
6
Score (out of 10)
Source: The Fraser Institute 2011.
8
10
Per Capita Income and Economic
Freedom Quartile
GDP Per Capita
(ppp), 2009
$35,000
$30,000
$25,000
$20,000
$15,000
$10,000
$5,000
$0
Most Free
Quartile
2nd Quartile
3rd Quartile
Least Free
Quartile
Most Free ……………. Least Free
Sources: The Fraser Institute; The World Bank, World Development
Indicators,
2011
Income Share of the Poorest 10% and Economic
Income Share Held by
Lowest 10%, 1990-2009
Freedom
3.0%
2.5%
2.0%
1.5%
1.0%
0.5%
0.0%
Most Free
Quartile
2nd
Quartile
3rd
Quartile
Least Free
Quartile
Most Free …………….. Least Free
Sources: The Fraser Institute; The World Bank, World Development Indicators, 2011.
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Income of the Lowest
10%, 1990-2009
Income of the Poorest 10% and Economic
Freedom
$9,000
$8,000
$7,000
$6,000
$5,000
$4,000
$3,000
$2,000
$1,000
$0
Most Free
Quartile
2nd
Quartile
3rd
Quartile
Least Free
Quartile
Most Free ……………. Least Free
Sources: The Fraser Institute; The World Bank, World Development Indicators, 2011.
GDP Per Capita % Growth,
1990-2009
Growth in Real GDP Per Capita (developing nations)
and Economic Freedom Quartile
3.5
3.0
2.5
2.0
1.5
1.0
0.5
0.0
Most Free
Quartile
2nd Quartile
3rd Quartile
Least Free
Quartile
Most Free ……………..…… Least Free
Sources: The Fraser Institute; The World Bank, World Development Indicators, 2011.
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Life Expectancy at Birth and Economic Freedom
Quartiles
80
Years
60
40
20
0
Most Free
Quartile
2nd Quartile
3rd Quartile
Least Free
Quartile
Most Free ……………. Least Free
Sources: The Fraser Institute; The World Bank, World Development Indicators, 2011.
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Economic Freedom and Life Satisfaction
Life Satisfaction
(out of 10)
Higher values indicate higher levels of satisfaction
8.0
7.0
6.0
5.0
4.0
3.0
2.0
1.0
0.0
Most Free
Quartile
2nd Quartile
3rd Quartile
Least Free
Quartile
Most Free …………………. Least Free
Sources: The Fraser Institute; New Economic Foundation (2009), The (un)Happy Planet
Index 2.0. Why good lives don't have to cost the Earth.
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EFW map
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Economic Growth
improves the lives of the poor by
making the pie bigger
Bigger “slices”
mean higher
standards of
living
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Proposition:
A nation’s institutions determine its ability
to reduce poverty.
Institutions: the formal and informal “rules of
the game” that shape incentives and outline
expected and acceptable forms of behavior in
social interaction.
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Private Property Rights
Rule of law
Open, competitive markets
Entrepreneurship and innovation
Proposition:
A nation’s institutions determine its ability
to reduce poverty.
Institutions: the formal and informal “rules of
the game” that shape incentives and outline
expected and acceptable forms of behavior in
social interaction.
•
•
•
•
Private Property Rights
Rule of law
Open, competitive markets
Entrepreneurship and innovation
Proposition:
A nation’s institutions determine its ability
to reduce poverty.
Institutions: the formal and informal “rules of
the game” that shape incentives and outline
expected and acceptable forms of behavior in
social interaction.
•
•
•
•
Private Property Rights
Rule of law
Open, competitive markets
Entrepreneurship and innovation
Property Rights
Property Rights benefit the poor by making
owned capital secure and productive.
Lesson 2: “Property Rights and the Rule of Law”
Formal Legal Characteristics
• Definable
• Enforceable
• Transferable
An Important Note
• The term “Property Right” is shorthand for
Human Rights.
– The right to freely use and transfer possessions
including yourself.
• People, Not Property.
– Recognition of people’s right of ownership to
themselves and their labor.
Defined but not Enforced
• A right that is
defined but
not enforced
is useless.
defending & enforcing Property Rights is paramount
Property Rights and Growth
• Property Right holders have an incentive to
preserve their property.
• Owners consider the future.
• Owners will improve a property.
– The value of improvements reside with the owner.
Investment
• Secure property rights make investment more
likely.
• Property Rights allow people to obtain debt.
– Use of past and future incomes.
– Collateralization is of greatest benefit to the poor.
Property Rights and the Poor
• Property Rights are of the greatest benefit to the
poor.
– The rich can enforce rights over their property.
– The poor cannot.
• The definition and enforcement of Property
Rights gives the poor the same right enjoyed by
the rich.
• Secure property rights also contribute to
economic growth by enabling the poor to shift
effort from protective to productive activities.
Enforcing the Rules
• Rule of Force
– Anarchy
• Rule of Men
– Laws are enforced at the good will of the enforcer.
• Rule of Law
– Both the governed and the governing are ruled by the
same laws.
Big Picture
• Rights to property promote economic growth by
encouraging preservation, improvement and investment
in owned resources.
• In societies without clearly defined property rights the
poor are disadvantaged because they lack the resources
to enforce their rights.
Big Picture
• To effectively stimulate economic growth
property rights must exist within a society
characterized by stable and predictable rules of
law.
The Role of
Competition
Lesson 3: “Competition Opens Markets to the Poor”
To Compete or Not?
The question is not whether we
shall have competition, but what
forms it will take.
- Paul Heyne
• Competition will always occur.
– Scarcity
• We cannot fulfill all our wants at no cost.
Non-Market Competition
• What determines participation?
– Connections
– Wealth
– Etc.
• What determines production?
– No effective production signals.
– No effective incentives to innovate.
Market Competition
– Suppliers compete with Suppliers.
– Demanders compete with Demanders
– All are trying to Maximize Profits
• Profits draw a crowd
– It is about increasing revenue and lowering
costs.
Revenue and Costs
• Since demand curves slope downward, for
producers, there are three ways to increase
profits.
– Sell more at lower prices.
– Lower costs
– Innovate new goods that can command a premium.
Prices and Production
•
Prices are determined by the interaction of the Supply and Demand for a good.
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Pe
S
Pe
P2e
D
Qe
D
Qe Q2e
An Increase in the Supply of a good increases quantity traded and lowers price
More Sellers
More Supplied at Lower Prices
Innovation = Lower Costs = Increased Supply
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Communications
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Construction
Engineering
Opportunity
• The greatest impact on the poor comes from the
opportunities that competitive markets provide.
– Employment – Increased output – increased labor
usage.
– Entrepreneurship – The poor can get in the game –
not restricted to approved classes.
Case Study – Opening Markets in China
1977-78
• 250 million Chinese peasants with incomes below
the country’s official poverty line of approximately 70
cents (U.S.) per day.
• 600-700 million Chinese living on less than $1 per
day, the commonly used international poverty line.
• Most of the population were peasants, herded
together into communal farms. This system
produced very poor economic results with
widespread poverty and periodic famines.
Case Study – Opening Markets in China
1978
• Economic reforms begin: limited property rights and
open markets
• Communes were broken up and families given
individual plots of land and families were allowed to
sell some of their output in farm markets.
• The right to enter the market with their produce
drastically changed the incentives facing Chinese
farmers.
• This institutional reform led to a dramatic surge in
grain production in China and fueled spectacular
poverty reduction.
Decline in Numbers of People Living Below the
Poverty Line in China, 1977 – 1999
Millions of people
300
200
100
0
1977-78
1987
1993
1999
The Big Picture
• Competition and Markets benefit the poor by
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Providing more goods at lower prices.
Increasing the quality and variety of goods available.
Providing opportunities for work.
Stimulating entrepreneurial activities.
Unleashing the talent and abilities that were always
there.
Conclusions and Caveats
Economic Growth Overcomes Poverty
Markets create wealth and foster economic growth
Institutions of Capitalism
Provide the Framework and Incentives for the
Creation of Wealth
•Property Rights
•Rule of law
•Competitive markets
•Entrepreneurship / Innovation
Questions that Remain
Unequal Income Distribution
Income Mobility
Individualism of Property Rights
Barriers to the Institutions of Capitalism
Institutions of Capitalism
The Mix
Importance of the Rule of Law
Capitalism and Markets
•Lock us in mutual dependence
•Promote other regarding behavior
•Foster a civil society where anonymous
cooperation is the norm
•Benefit the poor in ways that are most
important to them, providing
Wealth, Dignity, and Mobility