“poverty, yeah“A file to file the teeth of the rats of reform. The number of repeal programs is equal to the number of reformers who suffer it, and the number of philosophers who know nothing about it,” Ambrose Bierce wrote over a century ago. Some things never change.
Why does poverty still exist, despite centuries of planning? Part of the problem is a matter of definition. Consider the following thought experiment that I have presented to various audiences over the years: Imagine a country where everyone earns $50,000 a year. Looking forward, I have two proposals that would have the following effect:
1. Everyone's annual income will be $55,000.
2. 90 percent of the population will have an annual income of $58,000 and the remaining 10 percent will have an annual income of $580,000.
Which option would you choose?
What has intrigued me over the years is how, in most cases, audiences are pretty evenly split between the two options. This thought experiment reveals a fundamental question that is rarely discussed publicly: When we think about income, is it absolute income or relative income that matters? Would you be happier if your income increased by 25 percent and everyone you know increased their income by 50 percent?
This thought experiment has immediate application to the question of poverty. What does it mean to be poor? Begging for food on the sidewalks of Kolkata is poor by any definition. But what about living just below the poverty line in America? Daily Economysuch a person is poor, but compared to a beggar in India, a poor person in America is incredibly wealthy. Which comparison is correct?
Rainer Zitelmann's How a nation can escape povertyI noticed a related thought experiment that highlights yet another complication in the never-ending debate about poverty: Imagine a country where each individual's income is less than the figure you want to use to define poverty. Then consider two proposals to the following effect:
1. The annual income of every citizen will rise to a level just above the poverty line.
2. The annual income of 10 percent of the population rises to 10 times the poverty line, the annual income of 70 percent of the population rises to 5 times the poverty line, and the annual income of 20 percent of the population does not rise at all.
Which option would you choose? The first option would eliminate poverty. The second option would create a much higher level of wealth. The importance of this thought experiment is that it reveals the difference between two questions that sound the same: When you think about a poor country, is the goal to eliminate poverty or to increase wealth? This difference between these two goals is the underlying idea of Zitelmann's book.
The large-scale development projects of the last 70 years have been focused on eradicating poverty. Zitelmann outlines the impact of these policies. In brief, they haven't worked. Looking across the work of Frank Bremer, Dambisa Moyo, William Easterly and others, it becomes pretty clear that, in the words of Easterly's subtitle, “Western efforts to help other countries have brought about a great deal of evil and very little good.”
Zitelmann concludes:
If the findings of so many scientific studies are so clear, why does the belief that development aid is the best way to lift countries out of poverty remain so persistent? I think it's because of what I call a zero-sum belief. Many people believe that poor countries are poor because rich countries have taken something from them. The implication is that if rich countries give up some of their wealth, poor countries will become richer.
Certainly, that seems simple: if the goal is simply to eliminate poverty, why not transfer some of the wealth of people in rich countries to people in poor countries? But this proposal leads to a major conflation of wealth and income. Providing funding to build a dam in a poor country involves a transfer of wealth, but it does not necessarily mean that it will result in increased future income.
Zitelmann wants to change the question from asking how to eliminate poverty to how to increase wealth. His formula is not that complicated: “Private property and a market economy are the basis of growth, and if the state does not interfere too much in the economy, everyone's lives will improve, especially the poor.” He goes on to argue that “capitalism, unlike socialism, cannot be dictated by the state. Capitalism grows as a spontaneous process from below, and the best thing political leaders can do is not to impede or hinder this process.”
This idea that free markets are the secret to economic growth is obviously not original to Zitelmann; he shows at the beginning of the book that Adam Smith formulated this basic argument 250 years ago. Zitelmann is also well aware that relying on markets to increase a nation's wealth does not necessarily benefit everyone equally. Citing the work of Angus Deaton, Zitelmann points out that inequality always increases as a nation rises out of poverty.
What sets Zitelmann's book apart from many others on the subject is how he makes his case. Of the 182 pages of text, 150 pages are devoted to case studies of two countries: Vietnam and Poland. What links these two countries? According to the Heritage Foundation's index, among countries with populations of 30 million or more, these two countries have seen the greatest growth in economic freedom since 1995. Both were relatively poor countries during the height of communism, but have grown rapidly in recent decades. Zitelmann's book aims to link changes in economic freedom to economic growth rates.
The chapter on Vietnam is a stronger example. In the mid-1980s, a decade after the war ended, Vietnam was one of the poorest countries in the world. It was also populous. Zitelmann points out that most people would be surprised to learn that Vietnam had a larger population than any other country in Europe. Given that France and the United States had been at war for decades, Vietnam's poverty may not be surprising. But the Sixth Party Congress, which came to power in December 1986, disagreed with that conclusion. Zitelmann explains:
It is a testament to the Vietnamese achievement that they did not attempt to blame the dire situation their country found itself in on external factors such as the long war with the United States and its attendant destruction, military conflicts with China and Cambodia, or natural disasters. Instead, the Party Congress' final resolution was explicitly self-critical: “Without underestimating the objective difficulties, the Party Congress has come to realize that the subjective causes of the current situation lie above all in the errors and mistakes in the leadership and command of the Party and the state.”
The government began by assessing the problem and then embarked on a series of far-reaching economic reforms. Doi Moi (translation: “renovation”). Restrictions on private enterprise, including its ability to hire workers, were relaxed, state-owned enterprises were returned to their original owners, central planning and price bureaucracy were dismantled, and both subsidies and price controls were eliminated. As John Miltimore has recently argued in more detail, Vietnam's economy has boomed. Vietnam is no longer a low-income country according to the World Bank's definition. Between 1993 and 2020, poverty fell from 80% to 5% of the population.
Poland experienced a similar period of rapid economic change. In the late 1980s, Poland was a poor country compared with other Communist Eastern European countries. Zitelman points to the 1988 Wilczek Law, a set of reforms that allowed the Minister of the Interior to turn anyone into an entrepreneur. The results were dramatic: within a year, 2 million businesses and 6 million jobs were created (Poland's population in 1989 was 38 million). Over the next three years, Deputy Prime Minister Leszek Barcerowicz followed with a series of market-oriented reforms, including privatization, deregulation, and tax reform. Since 1989, Poland has been the fastest-growing country in Europe.
Besides the similarity of being former communist countries that have adopted market economies, Vietnam and Poland have another interesting similarity. Zitelmann conducts surveys asking people how they feel about rich people. In the survey, he approaches the question in several ways. People are asked whether they agree with a range of statements, from “rich people who have succeeded through their own efforts are role models that motivate me” to “rich people became rich because of injustice in our society.” They are also asked which personality traits (imaginative, hardworking, honest, ruthless, greedy) they most commonly associate with rich people. From these surveys, Zitelmann constructs a “rich sentiment index.” The top two countries with positive sentiment toward rich people are Poland and Vietnam.
The lesson Zitelmann takes from his case study is simple: if you care about poverty, you should focus on encouraging positive views of the wealthy. Countries where people have a positive view of the wealthy are more likely to implement market reforms that make it easier for people to create wealth. As countries become richer, poverty decreases. After all, as Zitelmann points out, “It is not primarily the strong who need a market economy, because they can get by in any system. It is the weak and the poor who have their only chance of improving their living conditions in a free market economy.”
