Virtually all poverty reduction comes from economic growth and migration—not redistribution or philanthropy.
That’s how economist Bryan Caplan summarizes a fascinating new working paper by Lant Pritchett of the Harvard Kennedy School and Center for Global Development.
To make it easier to get the gist of the argument (without having to read all 32 pages), I’ve taken the liberty of “interviewing” the paper. All questions are my own and all answers (with the exception of the parts in brackets) are exact wording from Pritchett’s text.
What is the claim of this working paper?
My simple claim is that as any citizen of the West contemplates the question “What could we do to alleviate global poverty?” the right answer is: “The least you can do is better than the best you can do.”
What do you mean by the “best you can do”?
What I mean by “the best you can do” is addressing “global poverty” in the ways that individuals who want to give philanthropy directly to “the poor” seek. That is, what could I give money for that would fund concrete support and assistance to individuals that would produce the best outcome in alleviating “global poverty.” This is the “best you can do” if you want to fund actions that directly help people in a given place.
By this standard what is the “best you can do” to alleviate global poverty?
It turns out the “best you can do” to improve people’s self-assessed well-being is roughly give cash. That is, one might have supposed there were investments or programs for the poor that have super-high economic returns, but, after decades and decades of search, there is very little empirical support for that idea. As we will see [in the paper] there are some programs that do modestly better than cash, but not many and not by that much.
Okay, so if “the least you can do” is better than “the best you can do” what is this “least” we should be doing?
What I mean by the “least you can do” is just let individuals engage in perfectly ordinary economic transactions of taking a job and getting paid a wage. The only trick is that countries in the West would have to lower their enormously high legal barriers to the mobility of low skill labor across national borders for that to happen. But this is still “the least you can do” because this labor mobility is “win-win” in the usual sense of economists (potential Pareto improving, which may take transfers to achieve). Because the people who move make higher wages because they are more productive in the Western country than in their home country total output goes up sufficiently to make everyone better off (in principle).
This sounds a lot like your saying the way to reduce global poverty is to have open borders.
[N]othing I have said is about “open borders” it is about “more mobility” and the calculations are all about manageable increases—like 3 percent of the labor force
increases—that would be hard to suggest would undermine [total factor productivity] starting from given levels.
Even if true, most Westerners are concerned about how mass immigration could affect things other than “total factor productivity.” What about the political complexities of the issue?
I am not being cavalier about the potential political or administrative complexities in addressing these issues, but technically they are straightforward. For instance, it is argued that low-skill migration harms the host country because the fiscal contribution of the migrants is less than their fiscal burden. But this is a feature entirely under the control of the design of the labor movement. That is, if the worry is that children of migrants are using local schools then they (or their employer) could be charged a fee for each child enrolled. Or migrants might have to “buy into” eligibility for social programs. This is about distributing the potential gains between mover and host country and leads to difficult choices from a social, political, or ethical viewpoint but technically (and pragmatically in most countries) they are easy. In many countries today nothing is politically “easy.”
In theory, we might be able to help the global poor by allowing them to move to wealthier nations. In reality, there are numerous reasons why that isn’t likely to happen—even if we could agree (which we can’t) that they should. So you would say the next best approach is to give cash. Why not just give the money to aid programs?
[T]here are lots and lots of programs that spend money to deliver goods, assets, training, etc. to the poor that do much worse than cash (as many spend the money and have no sustained impact on incomes and many spend lots of money to produce small gains)
What about the programs that just give specific items or treatments?
When many people think of philanthropy they often don’t think of cash or incomes, they think of giving specific items or treatments that improving people’s lives directly—like food, or scholarship for school, or a bed net in malarial areas or building a toilet. But roughly the same logic applies here as it would be very hard to give someone a specific good in a way that makes them better off in their own evaluation than just having the equivalent amount of cash.7 Dupas and Miguel (2016) review studies of the Take-It-Or-Leave-It (TIOLI) purchase rates—the fraction of people who will purchase something at various prices—of various health promoting items from vitamins to soap to latrine slabs to bed nets. They find that purchase rates—which are the revealed preference indicator of the consumer’s valuation—are very low even at a small fraction of the costs. For instance, a water filter in Ghana that cost $15 elicited only a 10 percent purchase rate even at the highly subsidized price of less than $6. A $15 dollar latrine slab in Tanzania had only a 20 percent purchase rate at $6. Obviously spending $15 dollars to give someone something they would not themselves buy for $6 implies they would (much?) rather have the $15 dollars. This gain makes the case that to create $15 dollars of value for a poor person is generally going to cost at least $15 dollars.
Aren’t there examples of giving goods or treatments that have a net benefit to society?
Of course there are some goods that have positive externalities, as is argued for de-worming (Miguel and Kremer 2004) or sanitation, such that the total social gains are larger than the sum of the individualized willingness to pay.
Some people might find this an argument against philanthropic giving to the global poor. How would you respond to that?
All of this is not an argument against philanthropy, which is easily justified on redistributive grounds. That is, if marginal utility is declining in levels of income, say utility is the natural log of consumption, then the marginal utility is 1/consumption. This implies a dollar’s worth of consumption in utility terms of a person at the global poverty line is worth 64 times as much as a dollar to person in the highest decile of consumption in the USA (63.6=(1/(1.9*365))/(1/44,152) so transferring income from a rich person in the USA to a globally poor person produces, in and of itself, massively higher total global utility (even if not Pareto improving). The “cash as an index fund” approach is that rich people donating money that is spent in transaction costs to deliver something someone values less than a dollar isn’t optimal. But even if a rich person got only 20 cents to a poor person for each dollar sacrificed this still has 13 times more marginal utility than the rich person’s consumption at log utility. And for the real rich, who may have consumption ten times that of the average top decile in the USA, the case for philanthropy is overwhelming as the marginal utility of the poor would be over 600 times that of the extremely rich and hence even massive ineffectiveness would not offset this positive gain from giving.
Do you think foreign aid played any role in the massive successes of the development era, and if so, what was that role?
To use a sports analogy after a team has won a championship many of the players who are free agents will suggest they deserve a raise for having played a key role in the championship. The question is not whether the team won, it did, the question is the attribution of the win to the particular player—which in a truly team sport may be impossible (Pritchett 2017). Certainly the gains in human well-being over the last 60 years, like all successes, have many mothers and fathers—health breakthroughs, technological shifts, spread of political and economic freedom—but the question is parsing credit for success not blame for failure. This is important because the gains to countries from episodes of growth acceleration and the losses from growth decelerations/collapses are similarly huge. Therefore any action or expenditure or investment in ideas that has any role in changing the probabilities of growth accelerations or growth decelerations will have astronomical (ex post) returns and potentially high ex ante returns.
What is the optimal role of foreign aid?
About the only policy-like action that has anywhere near the welfare consequences of labor mobility are sustained episodes of rapid economic growth (and the losses from deceleration). Investments in creating accelerations and avoiding losses—even with small ex ante probabilities of success—have extraordinary returns. If that is what “foreign aid” does—create and disseminate ideas that are adopted and have system-wide impact on big factors that affect well-being, then it could be well worth it. This also can apply to “foreign aid” that creates other policy actions with positive consequences—like encouraging more effective education or actions that effectively promote health—at the countrywide level.
How would you summarize your argument?
Simply allowing more labor mobility holds vastly more promise for reducing poverty than anything else on the development agenda. That said, the magnitude of the gains from large growth accelerations (and losses from large decelerations) are also many-fold larger than the potential gains from directed individual interventions and the poverty reduction gains from large, extended periods of rapid growth are larger than from targeted interventions and also hold promise (and have delivered) for reducing global poverty.
