The Real Cure for Poverty is Growth

Posted on January 21, 2013
By Dr Muriel Newman

Last week former Prime Minister Helen Clark was subjected to a scathing review of the United Nations Development Programme that she has run since 2009.¹ The evaluation was carried out by her own executive board and covered the last two years of operation. It paints a picture of a confused organisation that is failing to achieve its goal of global poverty reduction despite spending more than US$8.5 billion between 2004 and 2011. The report was essentially a performance review of Helen Clark. It warned that the UNDP had underachieved in a wide range of areas including failing to properly evaluate the success of its poverty reduction initiatives, failing to share good ideas between its 162 country offices, and failing to ensure that worthwhile pilot programmes were expanded to maximise their benefits.

According to the World Bank, the number of people living in abject poverty on US$1.25 or less a day is continuing to fall across the globe, declining from 1.9 million in 1981 to 1.3 million today. This number is expected to continue to fall – not because of programmes like the UNDP, but because economic growth is lifting people and nations out of poverty.

In 2001, the World Bank published a study that examined economic progress in 92 countries over four decades, searching for the factors that were responsible for lifting the incomes of the poor to the greatest degree. In Growth is Good for the Poor, the authors found that when average incomes rise, the average incomes of the poorest fifth of society rise proportionately.² This held true across regions, periods, income levels, and growth rates. They found that factors responsible for improving economic growth between countries, such as the rule of law, openness to international trade, and developed financial markets, benefited the poor as much as everyone else. While they did find some evidence that lower inflation and smaller government increased the income share of the poorest fifth in society over other groups, the results were inconclusive.

In 2005 a further World Bank study, Aid and Growth: What Does the Cross-Country Evidence Really Show?, reinforced these findings: there was no evidence that aid was able to improve economic growth – ever.³ Part of the reason for the failure of aid to produce any significant long-term benefits appeared to be that most of the funding either came with strings attached – dictating that the money must be used in particular way that sounded good in New York or London but was largely ineffective in the field – or that it goes to governments and leads to corruption.

As Zambian economist Dambisa Moyo explained, “We know that there is no country – anywhere in the world – that has meaningfully reduced poverty and spurred significant and sustainable levels of economic growth by relying on aid. If anything, history has shown us that by encouraging corruption, creating dependency, fueling inflation, creating debt burdens and disenfranchising Africans (to name a few), an aid-based strategy hurts more that it helps.”⁴

Helen Clark has hit back at her executive board, defending her UNDP actions with ‘transformational change’ rhetoric.  However, this has echoes of the Closing the Gaps strategy that her government introduced into New Zealand in 2000 in order to close the so-called income gap between Maori and the rest of society. Closing the Gaps was a misguided policy based on the notion that income disparity was a race issue. Helen Clark planned to spend $140 million over 4 years on this Rolls Royce affirmative action programme to deliver services based on race instead of need.

But the policy met strong opposition and was discredited. The Race Relations Conciliator at the time, Dr Rajen Prasad – who is now a Labour Member of Parliament – climbed into the debate claiming that delivering social services through iwi and other Maori structures would result in discrimination against non-Maori.  Even the Plunket Society joined in, saying that poor health was linked to lower incomes, not race. But the nail in the coffin of the policy was a damning critique produced by the Department of Labour’s senior research analyst Simon Chapple that showed Maori deprivation was a socio-economic issue based on factors such as age, education, skills, and place of residence rather than ethnicity.⁵

At the time the policy was launched, Helen Clark said the initiative was in response to a “strong voice from Maoridom urging that it be able to take control of its own destiny, determine its own strategies, and devise its own solutions.” While the Closing the Gaps policy was abandoned, those same strong voices from Maoridom did not give up and were clearly behind Whanau Ora, the $134 million reincarnation of the policy, that was launched in 2010 as part of the Maori Party’s confidence and supply agreement with National. New Zealand First leader Winston Peters is a strong critic of Whanau Ora, attacking the programme as a “bro-ocracy” designed to gift taxpayer funding to Maori for family reunions, gang activities and other “nonsensical purposes”.

As with overseas aid, such welfare programmes often do more harm than good. Instead of pouring funds into questionable schemes, governments should focus their efforts on lifting economic growth and creating an environment in which small business can flourish, since these are the only proven pathways for improving outcomes for the disadvantaged.

With that in mind, the comments last week by the outgoing boss of Coca Cola, that New Zealand’s ingrained anti-corporate mentality is stifling business growth in this country, should ring a warning bell.⁶ While “big business” has traditionally been a scapegoat for the union movement, these days the anti-business mantra is also being promoted by the environmental movement, and together their influence is poisoning public attitudes. The problem is that their attack on business – which is purely political and based on self-interest – is now damaging the country. With their anti-business propaganda being parroted by the media, there is a danger that the public risks losing sight of the multitude of benefits provided by our bigger businesses. The contribution they make to our society in terms of providing secure jobs with good incomes, along with great down-stream opportunities, is immense. With private sector businesses – not governments – responsible for improving living standards, we should be championing business success, not condemning it.

Late last year, a report on child poverty in New Zealand was published by the Children’s Commissioner. It identified 78 recommendations that it claimed would alleviate “child poverty” in this country – at a cost of $2 billion.⁷

In his report the Children’s Commissioner defines relative poverty as “60 percent of median disposable household income, after adjustments for housing costs”. The median disposable household income for a New Zealand family of four – after paying the rent or mortgage – is $1,000 a week. That means that any child in a family of four with a household income of $600 or less a week – after paying their housing costs – is classified as living in poverty. Using this definition, the Children’s Commissioner claims some 270,000 New Zealand children are living in poverty. But the problem is that as the median household incomes rises, to say $1200 after housing costs, so too would the value of relative poverty, to $720 a week – and 270,000 children would still be classified as living in poverty, making a mockery of the whole measure.

The Children’s Commissioner’s estimates of poverty are based on relative poverty, not the abject poverty seen in third world countries. But relative poverty is not a real measure. Instead it is a political construct that is used by socialists to justify the on-going redistribution of wealth, since by its fundamental definition, it can never be eliminated.

Welfare commentator Lindsay Mitchell, this week’s NZCPR Guest, has examined the issue of child poverty in New Zealand looking to identify the cause. In her article Born on a Benefit, she looks at the high rates of birth to families on welfare and concludes that child poverty is largely the result of irresponsibility – an irresponsibility caused by welfare.

“The Norm Kirk government of 1973 which bowed to pressure to provide statutory assistance for mothers who’d lost the support of a partner, would have been aghast if afforded a glimpse of a future in which supposedly single woman were allowed, and even encouraged by some, to breed on a benefit. Twenty two percent of all babies born in 2011 were on welfare by Xmas. But even pre-recession, when New Zealand briefly enjoyed the lowest unemployment rate in the world during 2007, the percentage only dropped to eighteen. Having babies on a benefit is part of the New Zealand culture. That’s what’s primarily driving this country’s child poverty scandal. In a word, irresponsibility; irresponsibility of the people who produce the kids, but arguably worse, irresponsibility of the society that sanctions it.”

Last year, Treasury produced a report that looked at income mobility and deprivation in New Zealand. It found that after seven years only a quarter of those who were assessed as being in the bottom income decile were still there.⁸ In other words, three quarters of those in the poorest households were able to improve their situation. The resulting policy recommendation was that the government should ensure that people do not face barriers to improving their circumstances.

With this in mind it is interesting to note the German experience, which ten years ago was grappling with high unemployment. That is until they realised that the real problem wasn’t the supply of jobs, but the supply of willing workers. That’s where mini-jobs came in: “There is special focus on mini-jobs, contracts that allow a worker to earn 400 euros a month tax-free on the condition that they can be sacked at any moment. Germans can have as many such jobs as they like, but only one with the same employer. The official figures show that, within a year of their introduction, there were 500,000 more part-time jobs, with a good record of leading to full-time employment. Youth unemployment was indeed halved.”⁹

Whether or not the mini-jobs concept is right for New Zealand, what we do know is that just as more aid will not cure world poverty, more welfare will not permanently improve the lives of the disadvantaged. The government must continue with an unrelenting focus on growing the economy and creating opportunities for people to improve their circumstances through their own efforts.