PPP’s Impact on Poverty Rates Highlights the Value of Multidimensional Poverty Measures

Last week the International Comparison Program published Purchasing Power Parity (PPP) numbers for 2011. Based on surveys of prices in almost 200 countries, these numbers aim to effectively create a set of exchange rates that equalize what each country’s currency can purchase. PPP influences several economic outcomes of interest. For example, as highlighted by The Economist, the new PPP numbers mean that by the end of this year China’s economy, measured in Gross Domestic Product PPP, will likely be larger than the U.S.’s economy.

The new PPP values also have a significant effect on poverty rates. Initial calculations by analysts at the Brookings Institution and the Center for Global Development (see below) indicate that applying the new PPP reduces the number of people in extreme poverty by hundreds of millions of people. Because relative prices in many countries are lower than previously estimated, millions of individuals in India, Nigeria, Bangladesh, Kenya, and many other countries whose incomes were previously counted as below the $1.25 per day cutoff for extreme poverty will now be categorized as above the extreme poverty cutoff, according to these calculations.

The World Bank is expected to release new poverty numbers based on the PPP soon, but in the meantime other analysts have already estimated the dramatic changes in poverty numbers that the new PPP values are expected to generate.  The Brookings Institution’s Laurence Chandy and Homi Kharas wrote an illuminating blog post calculating the changes in global and national poverty rates. The Center for Global Development’s Sarah Dykstra, Charles Kenny and Justin Sandefur wrote a blog post with their calculations and analysis, engagingly titled Global Absolute Poverty Fell by Almost Half on Tuesday. Chandy and Kharas point out that not only does the PPP revision reduce the number of people whose incomes are below the $1.25 per day cutoff, but it will also change the cutoff itself, which is based on poverty lines in the world’s 15 poorest countries.

Understanding and accurately measuring poverty are critically important. Eradicating extreme poverty by 2030 is becoming a central goal of the World Bank, the U.S. Agency for International Development, the High-level Panel on the Post-2015 Development Agenda, and other global development actors. Incorporating the latest price data into measures of extreme poverty is necessary to accurately assess the scale and distribution of the problem and to gauge progress in combating it.

However, the startling impact that the PPP revision can have on poverty rates also points to limitations of income-based poverty measures that by their nature rely on relative price patterns across countries. As Dykstra, Kenny and Sandefur point out, nothing changed in the lives or opportunities of the hundreds of millions of people who had been classified as living in extreme poverty but will suddenly no longer be, given the PPP revisions. The authors conclude, “In fact, if the new PPP numbers suggest anything, it is that the quality of health or education or access to services associated with a given income has just gone down.”

Their statement highlights the reality that the challenges poor individuals face are not just lack of income – which is what the $1.25 measure captures – but also lack of quality health care, education, nutrition, sanitation, housing, and other basic needs.

The limitations of income-based poverty measures highlighted by the PPP revisions point to the value that can be derived from multidimensional poverty measures. The most widely used such measure, the Multidimensional Poverty Index (MPI), was developed by the Oxford Poverty and Human Development Initiative (OPHI) and UNDP and is used in over 100 countries to measure deprivations at the household level in health, education, housing, sanitation, water, energy, and assets.

Unlike income-based poverty measures, the MPI is not dependent on the PPP, inflation, or other macroeconomic variables. Rather, the MPI directly measures deprivations in critical aspects of poor individuals’ lives, such as child mortality, nutrition, sanitation, school attendance, and access to water. The MPI uses the Alkire-Foster measurement method and is decomposable by dimension, household, and sub-national region. Several national governments have adapted the measure to create national poverty measures and a Multidimensional Poverty Peer Network is working to strengthen country applications.

Income-based poverty measures play a critical role in assessing poverty, designing poverty reduction strategies, and evaluating impacts. Multidimensional poverty measures do not replace income-based poverty measures. Multidimensional measures complement income-based measures by providing a comprehensive picture of the breadth of deprivations that poor household experience and – importantly – the extent to which households experience multiple deprivations.

Is measuring both overkill? Interesting to researchers but not relevant to the targeting or implementation of poverty reduction activities? Sabina Alkire, Jose Manuel Roche, and Andy Sumner find that patterns of multidimensional poverty differ from patterns of income poverty across countries; and examining India, Alkire and Suman Seth find that patterns of income poverty reduction within the country differ from patterns of multidimensional poverty reduction. This suggests that using only one type of poverty measure to target program efforts may miss large numbers of poor households. Furthermore, understanding the specific deprivations and combinations of deprivations that households in different communities and regions face can help inform programs to focus on the sectors of greatest need and on households with multiple deprivations.

To eradicate extreme poverty, we need to apply all the tools at our disposal. When it comes to metrics, this means measuring both income poverty and multidimensional poverty. Especially when statistical earthquakes like a revised PPP strike.

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Fair Trade and the Multilateral Trading System

Co-Authored by Pegi Ylli.

In the past century, the world’s economies have grown at a phenomenal rate leading to rising standards of living across the world as billions of people have been lifted out of poverty. Despite these advances though, there remains an unfortunate regularity; income inequality remains uncomfortably high, while income and standards of living among the poor in the poorest countries lag far behind the high incomes and standards in the developed countries in the world. Clearly many people are being left behind, inspiring a search for solutions.

For some observers, the primary reason for the growth of living standards within developed economies is the expansion of markets and an international division of labor based on comparative advantage. One solution for poorer countries, then, is to facilitate their entry into the international trading system by promoting the liberalization of international trade and investment. This is the primary goal of the multilateral trading system embodied in the World Trade Organization (WTO).

Another approach to the lagging living standards in poorer developing countries is embodied in the alternative trade organizations that have arisen; most importantly the fair trade labeling initiatives. In this system, specific products that are traded internationally, such as coffee, tea and cocoa, can receive a Fair Trade label after a Fair Trade labeling organization has adjudged that a fairer share of the final price has accrued to the poorer farmers of the product and that the product is produced under fairer labor conditions. A fair price to the poorer farmers is usually a guaranteed minimum dollar amount per unit designed to provide the farmers with something closer to a living wage. Fairer labor conditions generally means the establishment of longer term contracts between intermediaries and the primary good producers and adherence to sustainable farming standards.

Proponents of each approach to economic development tend to view the alternative approach with suspicion. Thus, proponents of free trade and the WTO system tend to believe that fair trade is a subjective concept that does not translate into simple and widely acceptable policy guidelines. The guidelines that are used to justify a label are somewhat arbitrary and may lead to greater inefficiencies in production resulting in more harm than good. In contrast, some proponents of fair trade tend to consider the large inequalities in income to be caused largely by the promotion of freer international trade and believe that the WTO expansion contributes to the promotion of poverty. In their view, fair trade is a superior substitute to the multilateral trade system. Other supporters of fair trade, however, believe it is acceptable to “mainstream” fair trade products by working with large-scale multinational firms who benefit from the multilateral trading system. Under this view, fair trade is complementary to the system of multilateral trade liberalization, and the two can advance together.   To better understand the interaction between these two systems, it is worth elaborating on the features of both.

Free Trade Promotion and the Multilateral Trading System

Some critics of the WTO contend that the poor nations of the South are “straitjacketed by … (the) trade rules in the WTO (and) cannot use import duties to protect their weak economies, their fledgling industries, or their small farmers from unfair international competition” (Jaffee, 2007). In this view, the WTO rules allow rich countries to take unfair advantage of poorer countries. However, this view is a misrepresentation of the WTO. In actuality, there are no WTO “rules;” instead there are promises made by each participating country to liberalize its own trade policies. These policies are liberalized not to some harmonized standard, but instead to a lower level than that same country had in place prior to the agreement.   Developing countries are not expected to maintain the same low tariff barriers as developed countries; instead they are allowed much more flexibility in setting tariffs than the most advanced countries. For example, whereas average bound (or maximum) tariff rates in the US are about 3.5% and in the EU 5.2%, middle income countries are allowed to maintain higher tariff bindings (WTO). Brazil has bound tariffs at an average of 31.4%, Argentina at 31.9% and Chile at 25.1%. For poor developing countries, the negotiated maximums are even higher. In Guatemala, the average bound tariff is 41.2%, in Nicaragua 40.7% and in India 48.6%. Although developing countries currently set, or apply, their tariffs at a much lower rate (on average at about 12%), these countries have the ability to raise tariffs in times of trouble without violating their international WTO commitments.

The area of agricultural policies is where developing countries can rightfully complain about the multilateral trading system. Developed countries support their agricultural industries with a complex system of domestic support programs and export subsidies, usually to the benefit of entrenched interests and to the detriment of farmers in less developed countries.   However, the WTO is a forum that can be used to pressure developed countries into liberalizing their agricultural industries via adjustment to the Agreement on Agriculture within the WTO. Indeed, because further WTO adjustments (like completion of the Doha round) can only occur if there is a consensus, coalitions of developing countries have been able to prevent a Doha deal if it does not include acceptable changes in agricultural policies.   That there is no comprehensive Doha deal even after more than a decade of discussions is testament both to the new power of developing countries within the WTO system, as well as to the power of entrenched and resistant agricultural interests in the developed countries.

Many of the inequities and disadvantages for farmers in the South are because free trade does not prevail in those markets. Instead, powerful agricultural interests in the North work against the goal of trade liberalization in precisely those product areas in which the South has the greatest advantages. Although trade barriers are much lower in developed countries, they remain notably higher in agricultural goods and in textile and apparel products. The WTO goals are to reduce or eliminate these discrepancies, but unfortunately, despite decades of discussions to reduce or eliminate special protections for developed country agricultural industries, very little progress has been made.

The Fair Trade System

The goals of the fair trade system focus on one issue that is not a focal point of the free trade system, namely inequality. Laura Raynolds describes the movement as “a critique of historically rooted international trade inequalities and efforts to create more egalitarian commodity networks linking marginalized producers in the global South with progressive consumers in the global North” (Raynolds, 2009). This alternative trade model aims to establish better prices, long-term trade contracts, and resources for improving social and environmental standards for Southern producers of commodity goods. In short, fair trade is designed to provide compassionate consumers in the developed countries who care about poverty alleviation with a simple method to ensure that a greater share of commodity revenues goes towards improving the livelihoods of the poorest farmers.

Certification is central to how the fair trade system ensures product quality and production sustainability. Fairtrade International is an organization that monitors production, trade groups, and the Fairtrade certification process to assure that a set of principles is upheld.Fairtrade certification promotes these main principles: fair prices, fair and safe labor conditions, direct trade, democratic and transparent organizations, community development, and environmental sustainability (Fair Trade Resource Network). The Fairtrade label thereby assures Northern consumers that Southern producers were treated according to these principles and thus that their purchases will help alleviate poverty.

We may well ask why these goals of the fair trade movement are not satisfied by the multilateral trading system in the WTO. One reason is that free trade’s goal is not reducing inequality, per se, but rather the improvement of economic efficiency, which would generate a greater amount of goods and services available for consumption. This outcome could reduce poverty if the additional surplus were distributed to the world’s poor. However, if greater efficiency leads to production that is only consumed by the world’s wealthy, then the poor may be left further behind. For most free market advocates, improving world standards includes a twofold solution of maximizing production via free trade, then redistributing income so that the poor can enjoy a share of the extra benefits.

The fair trade system can complement to the free trade system because it offers a mechanism by which income can be transferred from rich to poor along a commodity chain. Because the fair trade system is voluntary, it does not violate any of the WTO trading principles and can operate independently alongside a free trade system. One problem with fair trade though is that the certification and monitoring process incurs extra costs that are then passed onto to the conscientious consumer.   The lower these implementation costs can be maintained, the larger can be the transfer to poorer farmers.   If these costs are too high though, the fair trade product premium will be higher, reducing the number of Northern consumers who would be willing to participate. One big advantage to fair trade, compared to outright foreign aid or charity, is that it does not look so much like charity.

A second reason that fair trade can complement the multilateral trading system is that it aims to correct for unfair outcomes. The poor may not be sharing the benefits of freer trade because free trade has not been achieved in many commodity markets. Already we have suggested that tariffs remain high for agricultural products. Protection reduces competition for import competing firms and results in economic inefficiencies. Additionally, many have argued that there is a concentration of market power along many commodity supply chains (Nicholls and Opal, 2005). These supply chains are like an hourglass, in which many producers supply many consumers on the other end, but the product must pass through the hands of a small number of wholesale intermediaries. If competitors cannot enter, these intermediary firms act like a monopsony, forcing a lower commodity price and taking advantage of poorer farmers while capturing a greater share of the surplus value generated by trade.

Imposing a minimum price floor for fair trade products raises the producer price closer to the price they would obtain in a truly competitive market, that is, a market in which intermediaries could not exercise their monopsony power.   The fair trade labeling process therefore creates a non-governmental method of maintaining a minimum wage and can therefore correct for an unfair outcome (Hayes, 2006). In this case, the price floor guaranteed to farmers through the fair trade system helps create an outcome closer to what would have arisen with free trade in a competitive market.

This complementarity of fair trade with the multilateral trading system has prompted some in the fair trade movement to support “mainstreaming.”   This involves partnering with big corporations and expanding marketing efforts through these new channels, thereby attracting a greater consumer base, increasing awareness, and giving producers more trading options. The promise of mainstreaming is the potential for rapid growth of the fair trade market.

However, fair trade purists believe that fair trade is a model for an alternative trading system that might one day substitute for the free trade multilateral system. In this view, “mainstreaming” is a sellout that threatens to divert fair trade away from its core values of establishing partnerships with like-minded organizations.

The Future of Fair Trade

Some resolution of the growing rift between the two approaches to fair trade may be necessary before fair trade can expand beyond its current niche market. In either case, expansion would require consumer acceptance of higher prices for commodity products and consumer awareness of alternative trading methods. An increase in the production of fair trade goods would also require quality controls and proper labeling. If fair trade wages continue to increase, other producers might claim to have fair trade products too, in order to benefit from higher prices, although those goods may not necessarily abide by the true certification guidelines. Also, if consumer demand for fairly traded goods rises substantially, the demand for conventional products would fall, causing a reduction in those prices, and perhaps reducing the wages of workers in the conventional markets. Thus, expansion of fair trade faces many obstacles to overcome in the future.

Fair trade is making strides towards achieving fairness in the global economic community by directly addressing the existing inequality gap between the developing and developed world, but for the moment it seems to have achieved little more than niche status. The fair trade movement will need to solidify its vision for the future if it can have a chance for further expansion.

Works Cited

Hayes, Mark. “On the efficiency of fair trade.” Review of Social Economy 64.4 (2006): 447-468.

Jaffee, D. (2007). Brewing justice: Fair trade coffee, sustainability, and survival. Univ of California Press.

Nicholls, A., & Opal, C. (2005). Fair trade: Market-driven ethical consumption. Sage.

Overview of fair trade in n. america. (2013, 09). Retrieved from http://www.fairtraderesource.org/wp/wp-content/uploads/2007/09/Overview-of-Fair-Trade-in N-America-vSeptember2013.pdf

Raynolds, L. T. (2009). Mainstreaming fair trade coffee: from partnership to traceability. World Development, 37(6), 1083-1093.

The World Trade Organization. (2014). Retrieved from http://www.wto.org/index.htm

 

Musing on Netmundial

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Netmundial, the multistakeholder meeting organized by the government of Brazil, was an inspiring mess. On one hand, it was the place to be–a Woodstock for internet activists and innovators. The Brazilian government paid tribute to these individuals and used the opportunity to signal that it intended to play a leading role in global Internet governance. On the other hand, the Brazilian government did not clarify the objectives, strategy, and desired outcomes for the April meeting. They did make it clear that the conference would yield a declaration with two sections: principles and a road map… But attendees were unclear as to how will policymakers use these principles and road map? Did the organizers intend to create a road map that could ensure that governments and business adhered to those principles?

On the day before the conference as well as conference day 1, I asked everyone I could: Are we creating norms or just a process to move Internet governance forward? Do governments sign the final document or do they nod in assent? How will assent be determined and by whom? Are we (representatives of business, academia, and civil society) speaking for ourselves or for groups we supposedly represent? I received a multitude of different answers. Fellow attendees—representatives of business, government, technical groups, academia, and civil society were diverse, opinionated, and divided.

By day one, it became quite clear that governments were playing a leading role in determining the language of the final principles and roadmap. And representatives of some governments such as the U.S., Kenya, Brazil, the Netherlands, and Germany as example, seemed very effective in working both the process and outcomes. Government delegates from these countries spoke frequently, issuing positive comments regarding NGO concerns, and suggesting language that facilitated consensus.

As in any formal negotiation, attendees moved in and out. Groups of NGOs, governments and businesses gathered in rooms near to but outside of the main conference room, massaging the documents.

NGOs were divided on what the final declaration should say. Some insisted on language that would ban surveillance; but they didn’t seem to recognize that the government officials present didn’t represent surveillance agencies or their legislatures and hence could not make such commitments. Others seemed content to have some language, albeit vague—The final declaration states on p. 11 “Mass and arbitrary surveillance undermines trust in the Internet and trust in the Internet governance ecosystem. Collection and processing of personal data by state and non-state actors should be conducted in accordance with international human rights law. More dialogue is needed on this topic at the international level using forums like the Human Rights Council and IGF.” But the declaration did not prod member states to commit to initiating such dialogue. Hence, we will all need further direction to find our way home towards an Internet where some governments constantly monitor our every keystroke.

The delegates also achieved vague language on cybersecurity. They agreed “It is necessary to strengthen international cooperation on topics such as jurisdiction and law enforcement assistance to promotecybersecurity and prevent cybercrime. Discussions about those frameworks should be held in a multistakeholder manner.” But here again, they could not agree on how because Netmundial could not commit government officials to any actions.

The preamble of the Netmundial final document says it all. “This is the non-binding outcome of a bottom-up, open, and participatory process involving thousands of people from governments, private sector, civil society, technical community, and academia from around the world. The NETmundial conference was the first of its kind. It hopefully contributes to the evolution of the Internet governance ecosystem.” [1] Notice the use of the words “nonbinding” and hopefully contributes. However, here’s what gives me hope. I met a lot of people—young and old, technically savvy and human rights literate from all corners of the globe. These people have significant expertise in cooperating to make the Internet safe, open, evenhanded and stable. They deserve our admiration, patience, and feedback as they work to maintain a multistakeholder approach to Internet governance in a world where governments (supposedly representing us) set the rules and can commit to action.

Susan Ariel Aaronson is Research Professor of International Affairs at GWU and the author of several studies on trade, internet governance and human rights. She is currently studying government purchase and use of malware as a trust, economic, and human rights issue.

1http://netmundial.br/wp-content/uploads/2014/04/NETmundial-Multistakeholder-Document.pdf

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The Future of Part-time Jobs in the US Economy

The Future of Part-time Jobs in the US Economy

For some time, people have feared that firms will replace full-time jobs with part-time jobs in order to cut back on costly benefits and taxes. This speculation has been spurred by debate over the Affordable Care Act, which mandates that employers with more than 50 employees provide health-insurance coverage to those who work 30 or more hours per week.

Using data from job site Indeed.com, I recently explored both the supply and demand for part-time jobs.  There has been a relatively small increase on both sides, suggesting there may be benefits for some job seekers and employers in part-time jobs, but the vast majority of future employment will continue to be full-time.  You can read more on the Indeed blog by following the link.  

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Janet Yellen leading the Fed – the Perspective of Two Female Economists

Janet Yellen leading the Fed – the Perspective of Two Female Economists

President Barack Obama’s nomination of Janet Yellen as the Federal Reserve’s next chair is historic, marking the first time a female has headed the central bank in its 100-year history. There is no question that Yellen, currently the Fed’s vice chair, is qualified to take the helm. But the nomination also has special significance for students at GW. 

This is a link to an an op-ed today in the Hatchet about Janet Yellen that I co-authored with Amy Guisinger, Ph.D. candidate in economics and a research assistant at the Institute for International Economic Policy at the Elliott School of International Affairs.