Millennium Global Challenge No. 7. How can ethical market economies be encouraged to help reduce the gap between rich and poor?

Reference: The Millennium Project

Nearly half a billion people grew out of extreme poverty ($1.25 a day) between 2005 and 2010. The number and percent in extreme poverty is falling. Currently it is about 900 million or 13% of the world population. The World Bank forecasts this to fall to 883 million by 2015 (down from 1.37 billion in 2005), while those living on less than $2 a day will fall to 2.04 billion from 2.56 billion. UN Development Project’s (UNDP) new Multidimensional Poverty Index finds 1.75 billion people in poverty. The number of countries classified as low-income has fallen from 66 to 40. However, the gap between rich and poor within and among countries continues to widen due to globalization, some argue, and the number of unstable states grew from 28 to 37 between 2006 and 2011. Nevertheless, global economic recovery from the recession of 2009 (–0.5% world GDP) is expected to continue. The world’s economy grew 5% in 2010, and the International Monetary Fund (IMF) expects growth at 4.5% for 2011 and 2012. Although better measures of human progress are being developed (see Millennium Global Challenge No. 2), GDP is still recognized as an indicator of economic change.

World GDP passed $74 trillion PPP (that is, corrected for purchasing power parity) in 2010 and is expected to pass $78 trillion in 2011, while per capita income grew from $10,800 (2009) to $11,100 (2010). The IMF forecasts economic growth to average 4.6% from 2011 to 2015, led mostly by emerging and developing economies. These are expected to average 6.6% growth compared with advanced economies averaging 2.5% growth over that same period. The contribution to world GDP in 2010 of BRIC, the emerging economic powers of Brazil, Russia, India and China, was over 17.5%. And with the addition of South Africa to that group, this ratio is expected to increase to 33% by 2015. World trade shrank 12% in 2009 but grew 14.5% in 2010, and World Trade Organization (WTO) expects it to grow another 6.5% in 2011. Developing economies’ exports grew 16.5%. Remittances increased to $440 billion in 2010. Total development assistance in loans and grants provided by countries in the World Bank’s Development Assistance Committee reached a record $128.7 billion in 2010, a 6.5% increase over 2009, but foreign direct investment inflows remained stagnant in 2010 at $1.1 trillion, and the International Labor Organization estimates that some 210 million people (about 32 million more than in 2007) are looking for jobs, bringing global unemployment to 6.2%. Industrial economies’ unemployment accounted for 55% of the increase in worldwide unemployment between 2007 and 2010. The UN Population Fund notes that in the 48 poorest countries, where population is expected to double by 2050, some 60% of the people are under age 25.

The world needs a long-term strategic plan for a global partnership between rich and poor. Forbes counts 1,210 billionaires, with 108 of the 214 added over the past year from the BRIC nations. Such a plan should use the strength of free markets and rules based on global ethics. Conventional approaches to poverty reduction (technical assistance and credit) that work in low- and middle-income stable countries do not work in fragile countries, which need stability first.

Ethical market economies require improved fair trade, increased economic freedom, a “level playing field” guaranteed by an honest judicial system with adherence to the rule of law and by governments that provide political stability, a chance to participate in local development decisions, reduced corruption, insured property rights, business incentives to comply with social and environmental goals, a healthy investment climate, and access to land, capital, and information. Direction from central government with relatively free markets is competing with the decentralized, individualized private enterprise for lifting people out of poverty.

New indicators for measuring progress and economic development are being developed to help managers move from short-term profit-based strategies to long-term viability. Technical assistance to leapfrog into new activities via tele-education and tele-work should be coupled with microcredit mechanisms for people to seek markets rather than non-existent jobs. An alternative to trying to beat the brain drain is to connect people overseas to the development process back home by a variety of Internet systems. If the WTO eliminated agricultural export subsidies, developing countries would gain $72 billion per year, according to UNDP. Structural imbalances in world trade have to be corrected to assure fair competition, respect of human rights, and labor and environmental standards, as well as efficient management of the global commons and prevention of monopolies. China’s monetary policy adjustments could help other countries’ economic development and access to world markets.

The low-carbon green economy has attracted over $2 trillion in private investment since 2007 and is a driving force for foreign direct investment. Climate Investment Funds of $6.4 billion help implement pilot projects in 45 developing countries through multilateral development banks (MDBs). Financing to the private sector by the MDBs increased from less than $4 billion in 1990 to $40 billion per year in 2010, while the 184-nation International Finance Corporation, a World Bank affiliate that lends to the private sector in developing nations, committed a record $18 billion in investments in private companies in 129 countries. Since 1976, microfinance institutions provided loans to over 113 million clients worldwide.

Challenge 7 will be addressed seriously when market economy abuses and corruption by companies and governments are intensively prosecuted and when the inequality gap — by all definitions — declines in 8 out of 10 years.

Regional Considerations

Africa: Net bilateral development assistance to Africa increased by 3.6% in 2010 to $29.3 billion, of which $26.5 billion went to sub-Saharan Africa. Despite a continued sustained economic growth since 2005 at an average of 4.7%, about half of sub-Saharan Africa continues to live in extreme poverty. Increasing commodity prices worldwide helped African oil exporters while having adverse effects on oil-importing countries. The East African Community is working toward economic integration. The rapidly evolving Chinese-African alliance is a new geopolitical reality that could help reduce income gaps for both sides; China-Africa trade is expected to triple between 2011 and 2015. The region’s development continues to be impeded by high birth rates, increasing food prices, gender inequality, income and location biases, weak infrastructure, high indirect costs, corruption, armed conflicts, poor governance, environmental degradation and climate change, poor health conditions, and lack of education. Although the world will meet the MDG of halving poverty from 1990 to 2015 due to China’s and India’s growth, 17 African countries will not.

Asia and Oceania: Asia’s economy grew 8.3% in 2010, according to the IMF, while WTO lists developing Asia’s growth at 8.8%, and it is expected to grow over 8.4% per year over the next five years, led by China’s average of 10% per year. India’s poverty ($1.25/day), which was 51.3% in 1990, is expected to fall to 22.4% in 2015. China’s poverty was 60% in 1990 and it is likely to plummet to 4.8% by 2015. China became the world’s largest exporter (28% growth in 2010) and the second largest economy, with over 13% share of world economic output in 2010. China is now challenged to keep its growth from generating dangerous inflation. Japan’s reconstruction after its environmental disasters will force it to reduce its development funding for the region. Increasing pollution, water and energy problems, and the rich-poor gap threaten the future economic growth of developing Asia. Corruption, organized crime, and conflict continue to impede Central Asia’s development. Natural disasters and the effects of climate change are threatening the development and the very existence of entire Pacific communities.

Europe: Investment by the core 15 states of the European Union in newer members is fostering integration and helps economies across the EU. Despite signs of economic recovery, unemployment is expected to remain at around 10% for 2011–12; by March 2011, average youth unemployment in the Eurozone was 19.8% (but 44.6% in Spain). Cutbacks in social expenditures were protested across much of Europe and are likely to increase economic disparities. The European Financial Stabilization Mechanism to stabilize the euro and assist debt-stricken EU countries, along with the Europe 2020 Strategy, is intended to stimulate the regional economy; however, financial difficulties persist, causing friction during implementation. The combination of aging populations, falling fertility rates, a shrinking middle class in some countries, and expensive public services is not sustainable without increasing the number of immigrants and more tele-entrepreneurs among retired Europeans. In emerging Europe and Central Asia, 36% of the population lives on less than $5 per day. The Stabilization Fund helped Russia recover from the global financial crisis better than expected. It has one of the lowest foreign debts among major economies and its foreign reserves are the world’s third largest, mainly due to revenues from oil and gas exports. Germany suggested lowering the EU’s agricultural subsidies to improve foreign assistance.

Latin America: The region’s economy grew 6% in 2010, helped by rising commodity prices, 40% growth in 2010 capital flows (largest in history to the region), and stimulating policies. Regional GDP is expected to grow about 4% annually over 2011–2015. Foreign direct investment for Brazil increased by a record 87% in 2010. Yet the region’s rich-poor gap continues as the world’s largest. The wealthiest 20% manage 57% of resources, while the poorest 20% only get 3.5% of the income. Brazil, Mexico, and Argentina experience the highest inequalities. The region needs to attract high technology investments, create better access to the means of production, change land tenure, encourage international companies to increase salaries, create long-range visions for education and labor demand, and expand microcredit with business training.

North America: The unemployment rate was 9% in the U.S. in April 2011 and 7.6% in Canada. The U.S. national debt is above the $14.3 trillion cap, and in 2010 over 43.9 million people (one in seven Americans) were enrolled in the food stamps program. Meanwhile, the top 0.1% of Americans control 10% of the nation’s wealth, the U.S. has the most billionaires, and CEO pay rose 24%. The six largest U.S. banks control 63% of U.S. GDP, but new financial regulations give government more control over the banking system and financial markets and increase protection of the poor.

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