Welfare Economics [1 ed.] 9781613241417, 9781604569469

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WELFARE ECONOMICS

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No part of this digital document may be reproduced, stored in a retrieval system or transmitted in any form or by any means. The publisher has taken reasonable care in the preparation of this digital document, but makes no expressed or implied warranty of any kind and assumes no responsibility for any errors or omissions. No liability is assumed for incidental or consequential damages in connection with or arising out of information contained herein. This digital document is sold with the clear understanding that the publisher is not engaged in rendering legal, medical or any other professional services.

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WELFARE ECONOMICS

PAUL E. WESTON AND

ROBERT N. TOWNSEND

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EDITORS

Nova Science Publishers, Inc. New York

Copyright © 2009 by Nova Science Publishers, Inc. All rights reserved. No part of this book may be reproduced, stored in a retrieval system or transmitted in any form or by any means: electronic, electrostatic, magnetic, tape, mechanical photocopying, recording or otherwise without the written permission of the Publisher. For permission to use material from this book please contact us: Telephone 631-231-7269; Fax 631-231-8175 Web Site: http://www.novapublishers.com NOTICE TO THE READER The Publisher has taken reasonable care in the preparation of this book, but makes no expressed or implied warranty of any kind and assumes no responsibility for any errors or omissions. No liability is assumed for incidental or consequential damages in connection with or arising out of information contained in this book. The Publisher shall not be liable for any special, consequential, or exemplary damages resulting, in whole or in part, from the readers’ use of, or reliance upon, this material. Any parts of this book based on government reports are so indicated and copyright is claimed for those parts to the extent applicable to compilations of such works.

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Independent verification should be sought for any data, advice or recommendations contained in this book. In addition, no responsibility is assumed by the publisher for any injury and/or damage to persons or property arising from any methods, products, instructions, ideas or otherwise contained in this publication. This publication is designed to provide accurate and authoritative information with regard to the subject matter covered herein. It is sold with the clear understanding that the Publisher is not engaged in rendering legal or any other professional services. If legal or any other expert assistance is required, the services of a competent person should be sought. FROM A DECLARATION OF PARTICIPANTS JOINTLY ADOPTED BY A COMMITTEE OF THE AMERICAN BAR ASSOCIATION AND A COMMITTEE OF PUBLISHERS. LIBRARY OF CONGRESS CATALOGING-IN-PUBLICATION DATA Welfare economics / Paul E. Weston and Robert N. Townsend (editor). p. cm. ISBN 978-1-61324-141-7 (eBook) 1. Welfare economics. I. Weston, Paul E. II. Townsend, Robert N. HB99.3.W433 2008 339.4'6--dc22 2008024455

Published by Nova Science Publishers, Inc.

New York

CONTENTS Preface

vii

Short Commentaries

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Does Introducing Rental Housing with Fixed Rental Terms Improve Welfare in Japan? Miki Seko and Kazuto Sumita

1 3

Strategic Democracy and Natural Resource Overuse: Groundwater Depletion in Tamil Nadu N. Suresh Babu, B.P. Chandramohan and S.N. Gajanan

13

Human Rights, Development and the WTO’s Non- Compliance S.N. Gajanan and Prerna Soni

25

Research and Review Studies

33

Chapter 1

The Institutions of Poverty Oliver Schmidt

35

Chapter 2

A Project ... Africa Alida Paunić

59

Chapter 3

The Identification and Measurement of Poverty Thanasis Stengos and Brennan S. Thompson

97

Chapter 4

Welfare Effects of Ecological Tax Reforms Tobias Kronenberg

123

Chapter 5

The Welfare Effects of Non Linear Growth Orlando Gomes

171

Chapter 6

Social Capital: Reciprocity or Satisfaction? Hugo Fort

213

vi Chapter 7

Why Are Trade Agreements Mostly Regional? A Welfare Analysis by Transportation Costs Demet Ulker and Hakan Yilmazkuday

229

Chapter 8

Welfare Dynamics of the Ricardian-Mills Model Alexandra M. Espinosa, José B. Galván and Antonio G. Gómez–Plana

243

Index

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Contents

255

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PREFACE Welfare economics is a branch of economics that uses microeconomic techniques to simultaneously determine allocative efficiency within an economy and the income distribution associated with it. It analyzes social welfare, however measured, in terms of economic activities of the individuals that comprise the theoretical society considered. As such, individuals, with associated economic activities, are the basic units for aggregating to social welfare, whether of a group, a community, or a society, and there is no "social welfare" apart from the "welfare" associated with its individual units. Here, 'welfare' in its most general sense refers to well-being. Welfare economics typically takes individual preferences as given and stipulates a welfare improvement in Pareto efficiency terms from social state A to social state B if at least one person prefers B and no one else opposes it. There is no requirement of a unique quantitative measure of the welfare improvement implied by this. Another aspect of welfare treats income/goods distribution, including equality, as a further dimension of welfare. Social welfare refers to the overall welfare of society. With sufficiently strong assumptions, it can be specified as the summation of the welfare of all the individuals in the society. Welfare may be measured either cardinally in terms of "utils" or dollars, or measured ordinally in terms of Pareto efficiency. The cardinal method in "utils" is seldom used in pure theory today because of aggregation problems that make the meaning of the method doubtful, except on widely challenged underlying assumptions. In applied welfare economics, such as in cost-benefit analysis, money-value estimates are often used, particularly where incomedistribution effects are factored into the analysis or seem unlikely to undercut the analysis. It is conventional to distinguish two sides to welfare economics: economic efficiency and income distribution. Economic efficiency is largely positive and deals with the "size of the pie". Income distribution is much more normative and deals with "dividing up the pie". Other classifying terms or problems in welfare economics include externalities, equity, justice, inequality, and altruism. This new book presents the latest research in the field from around the world. As explained in the first Short Commentary, a new mode of housing tenure in Japan, rental housing with fixed rental terms, was introduced in March 2000 with the revision of the Japanese Tenant Protection Law. We examined the implications of this new system by analyzing the determinants of the choices by households among the three types of housing tenure in Japan: owned housing, general rental housing, and rental housing with fixed rental terms, and calculate the estimated compensating variation, based on the three waves of

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viii

Paul E. Weston and Robert N. Townsend

Japanese household longitudinal data (Keio Household Panel Survey, KHPS) covering all of Japan. The difference between general rental housing and rental housing with fixed rental terms is reflected in the length of the contract term and the level of rent. We found that households with a smaller number of family members, those who moved from outside the local housing market, those headed by an unmarried household head, and those with plans to own a house in the near future tend to select rental housing with fixed rental terms. Younger and/or lower income households derived the greatest benefit from the revised law in the form of lower rents. The current levels of groundwater for agricultural purposes have fallen dramatically in many parts of the world. In India, over 66% of ground water has been exploited such that the future of farming and the agricultural sector is absolutely bleak. Under such circumstances, standard theory in welfare economics on public goods provision prescribes state intervention in terms of taxes, subsidies, licenses, fees and trading rights. But strangely enough in modern democracies, it is found that the state itself, through its policies contributes to the depletion of natural resources. Given bounded rationality of politicians and voters, we find that natural resource depletion as the equilibrium that arises, not because private markets fail, but because the state behaves as an agent in the market place. In the second Short Commentary we present results from willingness-to-pay analysis from Tamil Nadu farmers which reveal results consistent with impatience. The Declaration on the Human Right to Development has been accepted as the primary guideline for the World Trade Organization (WTO), and states exactly what constitutes fair development and trade practices. However, through many of its practices, the WTO has managed to defy The Declaration, and diminish this right to many smaller, developing nations. The WTO, despite having a clearly defined mission entailing of equality of service to all nations, has failed to live-up to its expectations in terms of meetings its goals in its entirety. The Doha Round, the recently initiated Agricultural Liberalization Act, and the Trade Related Intellectual Property agreement are prime examples of the WTO’s noncompliance with protecting the rights for developing states. In the third Short Commentary we apply recent advances led by Professor Amartya Sen in welfare economics to bear on this issue. Institutions shape the incentives and opportunities people find and create. The institutions of poverty discourage accumulations of assets, disable accountability of governance, and dilute potential. After an empirical overview of past and present prevalence of poverty and its scholarly explanations, the macro-economic conditions of poverty are outlined. At the core of Chapter 1 is the discussion of four institutions of poverty within economies; those are lack of assets, lack of accountability, lack of income predictability, and unfavorable spatial distribution. Analyzing the four institutions concurrently will explain poverty within any one country, either low- or high-income, and will allow establishing the level and persistence of poverty in any given country. their relative weight as determinants of poverty persistence is situation-specific, i. e. differs from region to region, country to country, and social set-up to social-set-up. Selected case-studies – of worldwide microfinance, of Germany's labor market reform, of India's Rural Employment Guarantee act – illustrate the heuristic framework that this chapter proposes to students and policy makers concerned of poverty. As explained in Chapter 2, in order to come to level I of civilization according to Kardashe scale all renewable sources should be employed to satisfy our energy needs. Necessity of doing so should not be considered only to avoid more and more visible

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Preface

ix

environmental treats, but to make investment in timely manner consulting a broad range of scientists around the globe to find more feasible solutions. Building an environment friendly world should not leave the poorest out but help, by investing in sun rich areas, economic development of the lowest income groups and ensure energy supply stability to high income ones. Measures of poverty are typically based on individual income shortfalls from a given poverty line. However, the notion of poverty embodies much more than this; individuals may be considered “poor” whenever they are deprived of certain basic human needs (e.g., nutrition, longevity, etc). Determining poverty levels requires careful consideration of the criteria used to identify those who are poor, and how this information can be used to develop useful poverty measures. In Chapter 3 we offer a basic overview of these two interrelated problems – the identification and measurement of poverty. Identification involves the selection of criteria which, if being met, characterizes someone as being poor. The second problem, measurement, involves aggregating the level of poverty in a community into a single statistic. Such statistics are useful for comparing the level of poverty between different populations, or, alternatively, between different subgroups of the same population (e.g., males vs. females). Furthermore, such statistics allow one to asses the efficacy of various antipoverty policies. Proponents of ecological tax reforms argue that these achieve a double dividend by reducing environmental pollution and unemployment simultaneously. Even if this is true, however, it cannot be taken for granted that the effect on welfare is positive. Ecological tax reforms affect the distribution of income between social groups, and the effect of income on welfare may differ among those groups. Also, the increase in employment may have to be bought by reducing real wages. Is society better off if employment rises while real wages fall? An attempt to answer this question must take account of the fact that income is not the only source of utility or welfare. The theory on labor economics has always realized that workers value leisure and dislike effort to a certain extent, which gives rise to a tradeoff between income and leisure. Furthermore, the recent literature on happiness and experimental economics shows that workers value fairness and derive a non-pecuniary benefit from working. These aspects of work must be taken into account when assessing the welfare effects of environmental tax reforms. Chapter 4 does this by setting up an efficiency-wage model in the tradition of Akerlof’s gift-exchange approach. It also incorporates a labor union whose objective is to maximize the workers’ utility rather than income. The model is applied to an analysis of ecological tax reforms. It is shown that the welfare effects of an ecological tax reform depend on the sequence in which its components are implemented. Since Dalton’s law does not hold in a distorted labor market, they also depend on whether taxes are levied on firms or workers. An ecological tax reform yields a double dividend, but since it benefits some groups while harming others, it does not yield a Pareto improvement and will not receive unanimous political support. Economic growth models are conventionally designed to characterize a mechanical representation of reality in which, after a period of transition, the economy attains a balanced growth path. This path, also known as the long term steady state, in which the economy ends up by resting permanently unless some external shock disturbs it, is generally characterized by the existence of a constant growth rate that is common to all the meaningful aggregate variables (output, physical capital, consumption, investment and others). This growth rate

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x

Paul E. Weston and Robert N. Townsend

may be identical to the growth rate of population and exogenous technological progress (in the case of neoclassical growth) or correspond to a positive per capita rate of growth (in endogenous growth models). These models allow not only to perceive which growth path the economy follows, but also to evaluate how the representative agent’s welfare evolves over time. This is generally done by looking at the values the utility function assumes for an optimal level of its arguments (typically, real consumption and the amount of the agent‘s time dedicated to leisure). If the growth model displays a constant long term rate of growth, it is straightforward to evaluate welfare dynamics: the utility of (detrended) consumption is constant over time. However, there is in the recent literature on growth an increasing amount of works that establish nonlinear relations between aggregate variables and in this way produce cyclical steady state growth without the need for introducing any external random process. Not only growth becomes nonlinear, but also welfare suffers fluctuations. These fluctuations should be measured in order to assess the gains or losses of cyclical motion. In Chapter 5, we review some of the growth models able to generate long term nonlinear time paths and evaluate the impact over welfare of such specifications relatively to the benchmark model of constant growth. The welfare evaluation must account not only for the differences on average growth, but also for the evidence that the representative consumer may prefer a smooth utility result than one displaying strong volatility. In Chapter 6, a game theoretical agent-based model of social interaction among selfinterested individuals is proposed to analyze the formation of voluntary civic associations. The implementation is through a cellular automaton in which cells represent agents engaged in some ”civic association” ( a voluntary association or enterprise) modeled by a social dilemma game, played between neighbor cells. Individuals use either ”Pavlov”- like or ”titfor-tat”-like strategies. The fraction of cells playing the game depends on the fraction of agents using Pavlov : the larger the first, the larger the second. This seems to point to individual satisfaction instead of to reciprocity as the main source of capital formation. Different dilemma games are studied by separate: the ”Prisoner’s Dilemma” (PD), ”HawkDove” (H-D) and ”Stag Hunt” (SH). An indication of the model’s robustness is that it gives very similar results for the three of them. Why are trade agreements mostly regional? By making a welfare analysis, we show that the existence of transportation costs may be a possible reason. In particular, we set up a model of two countries by considering the effects of transportation costs on the welfare of each country. We also consider in Chapter 7 the relative size of the countries in our analysis together with naming them as small and large countries. We first show that the optimal (Nash) tariff rates are decreasing in transportation costs; i.e., closer countries tend to have lower tariff rates between each other, which lead to higher trade volume across them. Moreover, while the small country definitely sets a lower optimal tariff rate when it makes an agreement with a larger country, the large country does not necessarily set a higher optimal tariff rate when it makes an agreement with a smaller country. After that, we make a welfare analysis by using a stationary dynamic tariff game approach and show that it is harder to make an agreement for both countries if the transportation cost is higher; i.e., countries tend to make regional agreements to maximize their welfare. Finally, we show that it is easier to make an agreement for each country if the share of the transportation income received by the country is higher.

Preface

xi

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Under general conditions, it has been proved that free trade improves the welfare of economies. Nevertheless, these conditions are not sufficient to guarantee that exist a path to drive an economy from autarky to free trade equilibrium. So that, it is not enough to know that economies are better off under free trade, if we do not know how to drive an economy from autarky to free trade. Chapter 8 analyzes the dynamic properties of the Ricardian–Mills model under commitment trade. One of the most features of this paper is its emphasis on the role of the information and predictions over the dynamic properties of the model.

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SHORT COMMENTARIES

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In: Welfare Economics Editors: Paul E. Weston et al, pp. 3-11

ISBN: 978-1-60456-946-9 © 2009 Nova Science Publishers, Inc.

DOES INTRODUCING RENTAL HOUSING WITH FIXED RENTAL TERMS IMPROVE WELFARE IN JAPAN? Miki Seko and Kazuto Sumita (Faculty of Economics, Keio University, Tokyo, Japan and Department of Economics, Kanazawa Seiryo University, Ishikawa, Japan)

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Abstract A new mode of housing tenure in Japan, rental housing with fixed rental terms, was introduced in March 2000 with the revision of the Japanese Tenant Protection Law. We examined the implications of this new system by analyzing the determinants of the choices by households among the three types of housing tenure in Japan: owned housing, general rental housing, and rental housing with fixed rental terms, and calculate the estimated compensating variation, based on the three waves of Japanese household longitudinal data (Keio Household Panel Survey, KHPS) covering all of Japan. The difference between general rental housing and rental housing with fixed rental terms is reflected in the length of the contract term and the level of rent. We found that households with a smaller number of family members, those who moved from outside the local housing market, those headed by an unmarried household head, and those with plans to own a house in the near future tend to select rental housing with fixed rental terms. Younger and/or lower income households derived the greatest benefit from the revised law in the form of lower rents.

Keywords: Housing tenure choice, Rental housing, Rent control, Japan and deregulation, Compensating variation

1. Introduction Should we buy housing or just rent it? Housing tenure choice is an important question, because housing is a basic necessity everywhere in the world. Tenure choice is an important decision especially in Japan where it remains relatively expensive by world standards.

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4

Miki Seko and Kazuto Sumita

In Japan, the Japanese Tenant Protection Law (hereafter JTPL) was recently revised in March, 2000. This revision introduced a fixed-term tenant contract system beginning in March, 2000 for newly contracted rental housing. This new system was introduced to address some glaring problems affecting the rental market in Japan. Japanese rental housing is notorious for being cramped and small. One of the reasons for this problem is the implicit rent control system that resulted from the JTPL. The JTPL depressed the rental unit size below what tenants would have chosen in the absence of this legislation. This is because landlords assume risk in renting housing because it is hard to know if tenants will turn out to be reliable and it is difficult to evict them except under extreme circumstances. As a result, landlords prefer to rent smaller-sized housing to singles or tenants with smaller families because there is a relatively high-turnover rate among such tenants. In addition, landlords have been reluctant to provide or adequately maintain rental properties because of legal protections for tenants that restrict landlords’ control over their property. These sweeping protections were introduced in 1941 because landlords were routinely bypassing existing renter protection provisions by creating an illegal black market in rental housing. Due to this widespread evasion of rent controls and frequent forced evictions by landlords, the JTPL was amended in 1941 and a just cause clause was introduced to strengthen protection from forced evictions. Before the most recent revision of the JTPL in 2000, Japanese housing was largely classified into either owned housing or rental housing. The JTPL, enacted in 1921 and amended in 1941, provides strong legal protections to renters in terms of renewal rights and rent increases. The just cause eviction control regulation was introduced in 1941 to lessen landlord-tenant disputes arising from the extreme shortage of housing during World War II. As a result, it is almost impossible for landlords to evict a tenant and the rent for an incumbent tenant is not permitted to exceed the rent of comparable newly rented units. Though initial rents are determined freely in the rental-housing market, subsequent rent increases must go through the courts if the tenant does not accept the rent increase. Contractrenewal rents approved by the courts have been, in general, lower than comparable market rents, especially at times when market rents increased markedly, such as in the bubble era during the late 1980s. Landlords do not have the right to not renew rental contracts when they expire without proving just cause to the satisfaction of the courts. Moreover, landlords cannot evict incumbent tenants without proving just cause. Since it is very rare for the court to acknowledge just cause and rule in favor of landlords, in practice tenants can live in rental housing at the same rent on an open-ended basis. Thus, the JTPL since 1941 provides strong legal protection for tenants from arbitrary eviction and has created a system of rent control at the discretion of the courts. In the wake of WWII when there was an extreme shortage of housing and widespread poverty, the JTPL helped preserve social stability and harmony, but conditions have changed considerably since then. One of the unintended and undesirable consequences of the JTPL has been the prevalence of cramped and small rental housing in the Japanese housing market. Consequently the law was revised in 2000 to address this problem. This revision introduces a third choice into the Japanese housing market: rental housing with a fixed rental term. The essential difference between general rental housing and fixed rental housing reflects the different risk structures of the two rental agreements. The general rental agreement is favorable to renters since rents are fixed. The biggest risk for the renter is a poorly maintained unit. However, landlords face the risk of an unreliable tenant staying, possibly making the

Does Introducing Rental Housing with Fixed Rental Terms Improve Welfare in Japan? 5 property less attractive to other renters in multiple unit rental complexes and reducing the value of the asset. There is also a risk that the landlord will be locked into an open-ended rental arrangement at below market rates, meaning that the landlord is unable to maximize the return on the asset. On the other hand, the fixed-term contract introduces market rental risk into the landlord’s calculus, although the landlord can adjust the rent in light of market conditions. This revision of the law enables landlords to raise their rents according to market conditions, and landlords can theoretically make a long-term contract if it is mutually acceptable. Furthermore, landlords are free from the risk of being forced to retain undesirable sitting tenants or retain desirable tenants at below market rates. The drawback of the fixed rental contract for the landlords is that it permits tenants to cancel the contract at any time. This revision of the JTPL reflects policymakers’ desire to promote an increase in the supply of good quality, large-size rental housing. Landlords will be willing to supply new larger rental housing if they can avoid de facto rent control at the discretion of the courts. Thus, there are now two kinds of rental agreements in the Japanese rental housing market. Since the change of the law, this new type of contract for rental housing is becoming more prevalent. We have examine the implications of this significant revision of the JTPL, highlighting the difference between the two types of rental housing tenure based on analysis of the determinants of the choice among the three types of tenure - owned housing, general rental housing and rental housing with a fixed rental term. Based on this analysis we assess how the revision of the JTPL affects the welfare of different types of households.

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2. Welfare Implications of the Revision of the JTPL In the following, we first explain the estimation results of the structural form conditional logit model and then calculate the welfare implications of the revision of the JTPL based on the estimated parameters. The estimation results of the structural form conditional logit model are tabulated in Table 1. In this regression, the following variables are used: relative prices (RELAP), permanent income (PINCOME), number of family members (FMEMBER), h.h.’s marital status (MARRIED), mover from other prefecture (NPLACE), whether the households have a plan to own housing within 5 years or not (PLAN), length of period the household lives in the present housing (HMONTH). Now we discuss the estimation results. As for the parameter estimates of α, the coefficient of the relative price (RELAP) becomes negative and significant as expected. Next is the coefficient of permanent income (PINCOME). Although both of these values have the expected negative signs, the coefficient of the general rental housing is significant at 1%, while the same value of the rental housing with a fixed rental term is significant at the 5% level. The coefficients of FMEMBER are significantly negative in both rental tenure models. As the number of family members increases, households tend to select owned housing. The coefficients of MARRIED are negative for both rental tenure models, but only significant for the rental housing with a fixed rental term. This reflects the tendency of married couples to not select rental housing with a fixed rental term. This may be because those households prefer longer lengths of residence without risk of eviction and stable rents rather than lower market rents.

6

Miki Seko and Kazuto Sumita

The coefficient of NEWPLACE is positive and significant. Movers from another prefecture have less information concerning the local housing market and may consider their initial residence period as a probationary period to decide if they like the new job that prompted their move and to get a sense of the living environment. Consequently, these households are likely to choose rental housing, especially rental housing with a fixed rental term from the range of housing tenure options. Table 1. Estimation results of the structural form conditional logit model Parameter Estimates RELAP

α

(General rental house) α 11 PINCOME FMEMBER MARRIED NEWPLACE PLAN HMONTH

δ11 δ12 δ13 δ14 δ15

s.e.

z

-3.121

0.534

-5.85 ****

-0.002

0.001

-3.60 ****

-0.657

0.108

-6.11 ****

-0.154

0.354

-0.44

2.631

0.911

2.89 ****

0.129

0.676

0.19

-0.007

0.008

-0.90

0.001

-2.59 ***

-0.682

0.138

-4.94 ****

-1.534

0.364

-4.21 ****

3.930

0.959

4.10 ****

1.040

0.660

1.58 *

-0.004

0.010

(Rental house with a fixed rental term) α12 PINCOME -0.002 FMEMBER Copyright © 2008. Nova Science Publishers, Incorporated. All rights reserved.

MARRIED NEWPLACE PLAN HMONTH N Log L

δ21 δ23 δ22 δ24 δ25

-0.38

492 -400.545

Note: Significance level: ****: 1%, ***: 5%, **: 10%, *: 15% This table is cited from Table 5 of Seko and Sumita (2007)

Other variables PLAN and HMONTH are included to capture the characteristics of rental housing with a fixed rental term. If the households have a plan to own housing within five years, they would select the rental housing with a fixed rental term. In this respect, the coefficient of PLAN of rental housing with a fixed rental term is expected to have a positive value and be significant. But this is only significant at the very marginal 15% level. On the other hand, the same coefficient for general rental housing is not significant, and the magnitude of the coefficient is smaller than that for rental housing with a fixed rental term. Therefore, those households that have a plan to own housing in the near future tend to select a fixed rental term. HMONTH is included to capture the expected length of stay in the

Does Introducing Rental Housing with Fixed Rental Terms Improve Welfare in Japan? 7 residence and the coefficient of this in the rental housing with fixed rental term is expected to have a negative sign, but they are insignificant. In summary, it is confirmed that the price of these tenures and permanent income play a decisive role in our three tenure choice model. The households with a smaller number of family members, those that moved from outside of the local housing market, those headed by an unmarried h.h., and those that have a plan to own housing in the near future tend to select rental housing with a fixed rental term. We analyze the welfare implications of the revision of the JTPL using the most widely 1 used welfare measure, the compensating variation . We calculate the compensating variation associated with the introduction of rental housing with a fixed rental term. We use the coefficient of relative price, as the parameter of the cost variable and estimate the compensating variation that arises from introducing rental housing with a fixed rental term into households’ options. The expected compensating variation is calculated as follows:

E (CV ) =

[ (

)

(

)]

1 1 2 log ∑ j =0 exp(αZ j + α1iYi + α 2′ i S i ) − log ∑ j =0 exp(αZ j + α1iYi + α 2′ i S i ) . −α

Here Z j represents the relative price (RELAP), Yi means the permanent income

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(PINCOME) and S i is the vector of characteristics that describe the household i, such as, household head’s marital status, number of family members, etc. The first part of the brackets represents the expected consumer surplus including the choice of rental housing with a fixed rental term, while the second part represents the expected consumer surplus without the choice. Means of E(CV) are summarized in Table 2. The mean compensating variations which are per household and per month were calculated for each of the three tenure options, and categorized into six groups: (i) whole sample, (ii) income level, (iii) age of the h.h. (iv) number of family members, (v) married couples with/without children, and (vi) age of the housing. The test of the difference between means by tenure is also shown in Table2. All JPY figures represent the average values per month per household. What are the costs and benefits of having or not having the new tenure option? In economics, the change in income necessary to restore the consumer to his/her original welfare level before a policy change (in our case, the welfare level with two tenure options) is called the compensating variation. The compensating variation measures how much extra money the government would have to provide if it wanted to compensate the consumer for the price change due to the policy change. The compensating variations in our paper measure the benefit of revising the JTPL and introducing the new tenure option of fixed-term rentals. In doing so, we can understand the impact of the revision on households’ welfare. For the whole sample, introducing rental housing with a fixed rental term increases the compensating variation by 311 JPY for owned housing, by 682 JPY for general rental housing, and by 1,205 JPY for rental housing with a fixed rental term, and the difference between these means are significant at the 1% level.

1

See, Train (1998, 2003) for the compensating variation for the logit model.

8

Miki Seko and Kazuto Sumita Table 2. Mean compensating variations when rental housing with a fixed rental term was introduced

nob 271

μ0 311

18

710

32

950

19

1444

n

***

**

161

337

85

635

40

1151

***

***

***

92

188

32

536

13

1020

***

n

n

109

375

92

777

49

1337

***

***

***

150

264

53

537

21

972

***

n

**

12

312

4

403

2

410

n

n

n

849

22

1745

25

1933

***

***

n

635

56

633

20

1086

n

**

**

327

34

563

14

793

**

n

n

189

37

233

13

432

n

n

n

198

208

68

353

21

484

***

n

n

16

1106

26

1859

30

2013

***

***

n

158

250

20

583

8

1383

***

n

**

66

371

84

743

31

1412

***

***

***

47

433

45

611

33

967

n

n

**

Owned house

(i) Whole sample (ii) Permanent income Low income PINCOME < 400 Middle income 400 ≤ PINCOME 125 0 0 3 4 1 1 9

Total 92 119 93 64 11 71 450

16

N. Suresh Babu, B.P. Chandramohan and S.N.Gajanan

Similar observations can be made when we examine the capacity of electric pumps and the total hours they operate, which are reported in Table 4. Capacity of electric pumps can be classified according to their Horsepower (HP). A HP = 3 or 5 represents a low capacity electric pump, and obviously, a HP of greater than 10 is a very powerful pump, that technically must also be power-intensive. From the sample, we see that 148 out of 160 most powerful pumps are operated for more than 12 hours a day. In fact, a total of 582 pumps out of a total of 650 (that is around 89% of all pumps) operate over 12 hours a day. Table 4 indicates the level of free-riding that takes place in this open-access context. Table 4. Horsepower Capacity of Pumps and Hours Operated Hours Operated 12 Total

HP = 3 0 1 1 10 12

5 0 5 22 134 161

5 – 10 2 12 13 290 317

> 10 5 3 4 148 160

Total 7 21 40 582 650

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Table 5 sheds yet another light on the free-rider phenomena. Here we classify Horsepower capacity of the electric pumps, according to farm size. First, we note that only 12 out of 650 pumps have low Horsepower (HP = 3) capacity. Consider the sum of pumps with HP greater than or equal to 10. This comprises 320 out of 650 or roughly 49% of the total pumps in the market. Nearly 85% of these pumps are owned by Medium and Large farmers. Indeed, Table 5 indicates that Medium and Large farmers are the only ones who own more than 2 electric pump sets. Thus, taken together, Tables 4, 5 and 6 indicate that, Medium and Large farmers have a greater incentive to operate a larger number of more powerful pumps, for long durations. Table 5. Horsepower Capacity of Pumps Based on Farm Size Farm Size Marginal Small Medium Large Total

HP = 3 7 1 2 2 12

5 68 32 45 17 162

10 61 86 142 27 316

> 10 26 30 64 40 160

Total 162 149 253 86 650

Table 6.Distribution of the Number of Electric Pumps by Farm Size Farm Size Marginal Small Medium Large Total

1 162 126 24 1 313

2 0 10 84 4 98

>2 0 1 19 19 39

Total 162 137 127 24 450

Strategic Democracy and Natural Resource Overuse

17

Households’ perception about the quality of water is also an important indicator of the consequences of open access extraction. In table 7, we summarize the findings on this aspect from both the districts. Households were asked to respond to the quality of water at the time of installing the well, and compare it to the current situation. Almost 92% (418 out of 450) of the respondents indicated quality to be either “Excellent” or “Good”. This has fallen to 24% (112 out of 450). Indeed, the percentage of households indicating “Satisfactory” or “Bad” has increased substantially. If the decrease in water quality is taken into account, then the implicit price of electricity is rather steep. Table 7. Perception about Quality of Water

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Quality levels Excellent Good Satisfactory Bad Very Bad Total

Quality Initially at Digging Thiruvallur Theni Total 35 36 71 168 179 347 19 5 24 2 5 7 1 0 1 225 225 450

Present Quality Thiruvallur Theni 6 0 39 67 94 70 75 83 11 5 225 225

Total 6 106 164 158 16 450

One of the most important consequences of open-access to an exhaustible resource is the substitution possibilities between outputs in a firm that produces multiple-outputs. Given free access to water, the farmers can choose between growing crops with different degrees of water intensity. However, the decision to pick the right crop depends upon the market price. If the highest priced crop is also the least water intensive, then the free-rider problem associated with free access is not a major issue. But if the highest priced crop is also highly water intensive, then firms will have an incentive to exploit the situation and draw water beyond optimal levels of extraction. Indeed, in our study we find that the highest paid crops like paddy and sugarcane are the most water intensive. As a consequence, groundwater depletion for these crops proceeds at a rapid scale, as the following table shows: Table 8. Groundwater Depletion on Cropping Patterns Present Depth minus Depth at Installation (in ft) < 25 25 – 50 50 – 75 75 – 100 100 – 125 125 – 150 150 – 175 175 – 200 > 200 Total

Paddy

Sugarcane

Jasmine

Groundnut

Maize

Total

41 36 29 38 14 13 18 4 2 195

20 27 5 9 4 10 6 5 42 128

0 3 1 0 0 0 0 0 2 6

0 1 2 4 0 0 0 1 1 9

3 5 2 0 1 1 0 0 3 15

64 72 39 51 19 24 24 10 50 353

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N. Suresh Babu, B.P. Chandramohan and S.N.Gajanan

In the above table, we calculate the difference between current depths of wells from their original levels, for five different crops. We note that the greatest difference occurs in paddy and sugarcane, while well-depths are negligible in least water-intensive crops. Besides depletion of water, there are considerations based on adequate power supply. In our sample, we find that farmers perceive power supply to be highly unreliable, and often face technical problems involving voltage fluctuations and transformer burnouts. Given that there has been substantial reduction in ground water, and that the quality of water has decreased over time, is it possible that farmers would be tempted to pay for reliable electricity, so as to reduce their opportunity costs from voltage fluctuations, repair and burnouts ? The responses of the households on their willingness to pay for a hypothetical package or reliable electric supply are summarized in tables 9 and 10. The survey reveals that, about 25% of the respondents (109 out of 450) are willing to pay a nominal amount for reliable power. This indicates that there is a potential for Pareto-improving contracts, which are not entered upon, given current societal arrangements. Further, from table 10, we note that a greater number of Marginal and Small farmers are willing to pay for the hypothetical package, whereas, practically not more than 2 large farmers have expressed any willingness. Given the number of wells, and electric pumps run by large farmers, their massive unwillingness to contribute to the social good underscores the importance of urgent public action. Table 9. Willingness to Pay (WTP) for a Hypothetical Package of Power Supply in the two districts selected for the study WTP

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Yes No Total

Thiruvallur 66 159 225

Theni 43 182 225

Total 109 341 450

Table 10. WTP for a Hypothetical Package Based on Farm Size Farm Size Marginal Small Medium Large Total

Thiruvallur 20 29 16 1 66

Theni 18 16 8 1 43

Total 38 45 24 2 109

3. Estimation Data for the study was generated using primary sources through questionnaire (Babu, 2007). The questionnaire was implemented to a total of 450 households from 32 villages located in two major districts (Thirivallur and Theni) in Tamilnadu, South India. The distribution of the number of households with different farm sizes and acreage is provided in Table 11 below:

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19

Table 11. Number of Households and Acres Irrigated by Farm Size in the Sample Farm Size Marginal Small Medium Large Total

Number of Households 162 137 127 24 450

Acres Irrigated 286 543 1025 486 2340

The respondents were identified based on multi-stage sampling and block-representation methods.2 Responses were generated for the household’s economic status such as income and consumption, perceptions regarding power use and quality, reliability of services. Contingent valuation methodology was adopted to elicit responses for willingness to pay for reliable electricity packages. We begin our estimation of the WTP by specifying a Household status function, such that for the i-th unit, we have

⎧0 if the unit is not willing to pay Ii = ⎨ ⎩1 if the unit is willing to pay It is customary to set the indicator function as a probit or as a logit function for empirical estimation. We use the logit formulation, and set up the estimable form of the dichotomous decision variable as:

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P( I = 1) = F (Y ) = F (a + b X ) = i i i

1 − (a + b X ) i 1+ e

The logit model estimates the probability of a certain event occurring ( P ( I = 1) in this

i

case) as a function of exogenous variables related to the household under consideration. More specifically, the dependent variable in our data is the likelihood that a respondent says “yes” to the question on his willingness to pay (WTP) for a reliable package of electricity. Exogenous variables in our analysis are presented in the following table: Table 12. Exogenous Variables for the WTP Logit Model Variables EDUC INCOME CASTE 2

Definitions The level of education of the respondent (head of the household): is a dummy variable = 1 if the head of the household is a literate; 0 if not. Net annual household agricultural income (measured in Rupees) Caste of the respondent; ): is a dummy variable = 1 if the household is a schedule caste; 0 if not.

For details on sampling and data collection see Babu (2007).

20

N. Suresh Babu, B.P. Chandramohan and S.N.Gajanan Table 12. Continued Variables

EXP

Experience in agriculture, or the number of years of farming

AREA

Area available for cultivation (measured in acres)

AREA_I

Irrigated Area (measured in acres)

SIZE

Total Farm Size (measured in acres)

PUMPS

Number of electric pump set connections

WATER

PERCEPT_R

Amount of water available (in cubic feet) Total Hidden Cost: in rupees, indicating the total cost of motor rewinding, pump maintenance, water purchase, voltage stabilizer, purchase of a higher capacity motor, and tank maintenance. Perception about power quality: is a dummy variable = 1 if the perception is “good”; 0 if “bad” Preference of free power over reliable power: is a dummy variable = 1 if the response is an “yes”; 0 if “no” Preference for low tariff over power cut and voltage fluctuation: is a dummy variable = 1 if the response is an “yes”; 0 if “no”

POWERCUT

Duration of power cut (measured in hours during the survey week)

BURNOUT

Number of transformer burn-outs experienced Experience fluctuations in voltage: : is a dummy variable = 1 if the response is an “yes”; 0 if “no”

HIDDEN QUALITY PERCEPT_F

VOLT

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Definitions

The logit model was run separately for the two districts and the results are presented in Table 12. We note that there are many variables that affect WTP significantly in both districts. The variables that are significant in both districts are PERCEPT, BURNOUT, and VOLT. This implies that the current conditions of high voltage fluctuations and constant burnout in the transformers are serious problems encountered by the farmers in both districts. Indeed, this is consistent with our findings that the coefficient of PERCEPT is positive in both regions. We also note from Table 12 that as hidden costs and WTP are positively related along with SIZE in Thiruvallur district. Concerns with the availability of water are greater in Theni district. Interestingly, in Theni, we find EDUC and INCOME affect WTP positively and significantly. Consequently, we have demonstrated that there is some WTP at least in cases where the household unit perceives a reduction in cost from a “hypothetical package”. Finally, the “Change in odds” column in Table 13 presents the odds-ratio. This reflects the change in odds for a unit change in a given independent variable. If the change in odds is greater than unity, then, this corresponds to odds in favor of the event occurrence, nee, a positive WTP. We find that INCOME, Irrigated Area (AREA_I), HIDDEN, BURNOUT, VOLT AND SIZE affect the change in odds positively in Thiruvallur district. Similarly, we find that the odds in Theni are positively related to EXP, AREA, INCOME and PUMPS. Table 12 shows that PERCEPT_R and HIDDEN also have large effects on the odds. Taken together, these results indicate that there is a positive likelihood that the farmers may be tempted to pay for reliable electricity.

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Table 13. Parameter Estimates, Standard Errors, Wald Chi-Square, Significance and the change in odds results from the logit model for the WTP analysis for the sample data from Tamil Nadu, India (Thiruvallur and Theni districts). District: Thiruvallur Exogenous Variables Intercept EDUC CASTE EXP AREA INCOME AREA_I PUMPS HIDDEN QUALITY PERCEPT_F PERCEPT_R POWERCUT BURNOUT VOLT WATER SIZE

Parameter Estimates 4.687 -0.594 -0.042 -0.017 -0.4 0.001 0.209 -1.301 0.001 -2.105 -4.396 0.726 -0.154 0.357 0.221 2.123 0.205

Standard Error 2.86 0.75 0.057 0.018 0.336 0.001 0.32 0.884 0.001 1.013 0.551 1.324 0.608 0.44 0.529 0.543 0.443

Wald Chi-Square 2.685 0.628 0.55 0.947 1.418 4.205 0.428 2.163 0.253 4.317 63.71 0.301 0.064 0.658 0.174 0.321 0.214

District: Theni Pr > Chi-Sq 0.101 0.428 0.458 0.33 0.234 0.04 0.513 0.141 0.615 0.038 0.001 0.583 0.801 0.417 0.676 0.231 0.644

Change In odds 108.453 0.552 0.959 0.983 0.67 1.001 1.233 0.272 1.01 0.122 0.012 2.067 0.858 1.429 1.247 0.898 1.228

Parameter Estimates -6.319 -0.328 0.001 0.039 0.214 0.001 -0.384 0.623 3.133 0.001 -1.459 2.231 -0.46 0.303 0.453 3.321 -0.644

Standard Wald Error Chi-Square 51.91 0.015 0.876 0.14 0.028 0.003 0.024 2.752 0.232 0.928 0.001 0.831 0.253 2.298 0.716 0.756 96.664 0.001 0.007 0.26 0.617 52.295 36.714 0.004 10195 0.148 0.56 0.292 0.877 0.267 1.857 1.579 0.595 1.172

Pr > Chi-Sq 0.903 0.708 0.958 0.097 0.335 0.362 0.13 0.385 0.932 0.61 0.001 0.952 0.701 0.589 0.605 0.865 0.279

Change In odds 0.002 0.720 1.001 1.04 1.239 1.001 0.681 1.864 22.952 1.001 0.012 9.312 0.632 1.354 1.573 0.525 0.976

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N. Suresh Babu, B.P. Chandramohan and S.N.Gajanan

4. Conclusions In a democracy, politicians can always hoodwink the electorate by providing free and open access to the Commons, because any tax on the Commons is not to their benefit. Thus, agents who are not involved in infinite-planning horizons will overgraze the Commons. In our sample study from Tamil Nadu, South India, we find evidence of the tragedy in the form of severe groundwater depletion, after the state provided free and open access to electricity. We find evidence of increases in the number of wells, depth of wells, number of powerful motor pumps, number of hours of operation, and increases in the production of water-intensive crops even among water-depleted farms. Finally, we find that there is a potential for charging a fee for a hypothetical package of reliable electricity among the marginal and small farmers. Even though the medium and small farmers are the greatest beneficiaries of free electricity, not a single one expressed willingness to for the hypothetical package. To expect all parties to come to the table to co-ordinate suitable actions in this context is naïve and moot. The fact that very regulators of externalities are themselves motivated by market forces to propagate the Tragedy is an interesting outcome within democracies.

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References Aiyar, Swaminathan and S Anklessaria (2001): Realistic Power Reforms ? The Economic Times, March 7. Babu, Suresh N, 2007, “Impact of Agricultural Power Subsidy on Power Consumption and Groundwater Use: A Case Study of Thiruvallur and Theni Districts of Tamil Nadu”. Thesis submitted to the University of Madras, February, 2007. Busch, Lawrence, 2000, The Eclipse of Morality: Science, State, and Market; Sociological Imagination and Structural Change series. New York: Aldine de Gruyter. viii, pp. 219. Chandrakanth, M. G and Romm, Jeff (1990), Groundwater Depletion in India--Institutional Management Regimes, Natural Resources Journal, Summer, v. 30, iss. 3, pp. 485-501. Chawla, K S (2004), Wean Farmers off MSP, The Tribune, January, 12. Damodaran, Harish, (2001), Myth and Reality of Powerful Farmer, Business Line, November 12. Gurusamy, M and Abhishek Kaul, (2004), Farm Sector on the Dole, The Hindu Business Line, January 29. Mohanty, Sanjay; Girisha, G. K.; Kamal, Sujat, (1997), Chasing the Watertable: Efficiency and Equity Effects of Electricity Pricing in Groundwater Management; Energy and economic growth: Is sustainable growth possible ? Proceedings of the 20th Annual International Conference. Volume 2, pp. 393-400, New Delhi: Tata Energy Research Institute. Nagaraj. N, Chandrashekar, H and Yatheesh, H. S (2003), Sustainability and Equity Implication of Groundwater Depletion in Hard Rock Areas of Karnataka--An Economic Analysis, Indian Journal of Agricultural Economics, July-September, v. 58, iss. 3, pp. 438-47. Reddy, V. Ratna (2004), Managing Water Resources in India: A Synoptic Review, Journal of Social and Economic Development, July-December, v. 6, iss. 2, pp. 176-93.

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Shaheen, F. A., and Shiyani, R. L. (2005), Water Use Efficiency and Externality in the Groundwater Exploited and Energy Subsidised Regime, Indian Journal of Agricultural Economics, July-September, v. 60, iss. 3, pp. 445-57. Wirl, Franz, 1996, “Can Leviathan Governments Mitigate the Tragedy of the Commons ?”, Public Choice, v. 87, issue. 3-4, pp. 363-77.

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In: Welfare Economics Editors: Paul E. Weston et al, pp. 25-31

ISBN: 978-1-60456-946-9 © 2009 Nova Science Publishers, Inc.

HUMAN RIGHTS, DEVELOPMENT AND THE WTO’S NON- COMPLIANCE S.N. Gajanan and Prerna Soni University of Pittsburgh, Pittsburgh PA USA

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Abstract The Declaration on the Human Right to Development has been accepted as the primary guideline for the World Trade Organization (WTO), and states exactly what constitutes fair development and trade practices. However, through many of its practices, the WTO has managed to defy The Declaration, and diminish this right to many smaller, developing nations. The WTO, despite having a clearly defined mission entailing of equality of service to all nations, has failed to live-up to its expectations in terms of meetings its goals in its entirety. The Doha Round, the recently initiated Agricultural Liberalization Act, and the Trade Related Intellectual Property agreement are prime examples of the WTO’s noncompliance with protecting the rights for developing states. We apply recent advances led by Professor Amartya Sen in welfare economics to bear on this issue.

1. Introduction The World Trade Organization (WTO), established in 1995 is the sole organization for regulating international trade. The WTO settles trade disputes, and serves as a forum for trade-related discussion. Most significantly, its mission is to ensure proper trade guidelines for efficient economic development. It has been understood that trade is the key ingredient in development, primarily through expansion of export-led growth. The current wisdom, that low-income countries can overcome the constraints on growth only through export expansion, has gained popular support (Gardner and Millikan, 1968). The WTO’s mission revolves around equity for all parties and nations. Most member countries have adopted certain philosophies as the frame work and reference point for economic growth and development. The Declaration on the Human Right to Development (The Declaration, henceforth) is the primary decree as to what constitutes fair international diplomatic conduct and development practices. The purpose of this paper is to examine the

26

S.N. Gajanan and Prerna Soni

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extent to which The Declaration and its agenda for human rights have been satisfactorily met by the WTO. Indeed, we show that WTO’s performance in this regard is rather shaky. It is important to link the agenda items within The Declaration, to broader issues on “Rights and Development”. In this regard, we bring the works of Professor Amartya Sen (1984, 1998) on Rights, Capabilities and Human Action to bear on this issue. Sen’s (1998) “Capability Approach” revolves heavily around the concept, that in judging quality of life, one should consider what people are able to achieve, and take into account, that different people and societies differ in their capacity to convert income and commodities into valuable achievements. Sen also emphasizes that economic growth and the expansion of goods and services are necessary for human development. Despite having obliged itself to satisfying these human rights, the World Trade Organization has failed to fulfill this obligation on several occasions. The Doha Round, the Agricultural Liberalization Act, and the WTO’s Trade Related Intellectual Property (TRIPs) agreement are prime examples of this negligence. All three of these instances deny the basic rights and philosophies outlined in Sen (1998), as well as in The Declaration. Among these are the need for satisfying “capabilities”, the opportunity to advance economically and socially, the right of any nation to sovereignty when developing, and equity when determining developmental regulations and practices. Furthermore, Sengupta (2004) mentions five key factors to ensure the maintenance of development as a human right. These are equity, non-discrimination, participation, accountability, and transparency. According to Sengupta (2004), none of these aspects can be disregarded, in the context of “Human Rights”. We detail the practices of WTO and demonstrate its failure in meeting these factors, and thereby disregarding certain “Rights to Development” to many smaller countries. For many years, wealthy, developed nations have dominated the WTO and, both inadvertently and intentionally, denied these rights to smaller, developing nations. Despite being an advocate of the WTO, internationally acclaimed philosopher and writer George Soros (2002) agrees with critics’ claims: “..the WTO is biased in favor of the rich countries and multinational corporations. This bias is due not to the mechanism of the WTO but to the way it has been used, and to the absence of similarly effective structures for the pursuit of other social goals such as the protection of the environment, labor rights, and human rights.” (Soros, 2002, p. 23)

This paper is divided into five sections. Section Two focuses on the lapses of the Doha Round. Section Three discusses the recent Agreement on Agriculture and its negative impact on the independent farmer, and Section Four focuses on Trade Related Intellectual Property Rights and the manipulation of developing nations and their resources. We end the paper with a brief summary and conclusions.

2. The Doha Round Initiated in 2001, the Fourth Ministerial Conference in Doha, Qatar proved to be more effective and righteous in theory than in practice. Its original purpose was to create a forum for negotiations among member nations, while developing and initiating new trade policy. The primary focus of this round was agricultural trade discussion. While the WTO has ensured the world that all negotiations are done with equity among nations, its actions during

Human Rights, Development and the WTO’s Non- Compliance

27

the Doha Round would suggest otherwise. It is in this aspect that the Doha Round was seen to, not simply terminate, but rather to collapse in 2006 (Walden, 2006). Upon evaluation of the proceedings of the Doha Round, it is apparent that developed nations dominated the forum while developing nations were not treated with equity as they should be, as mentioned in Sengupta (2000, 2004). According to Sengupta (2004), “Equity” is one pillar of the maintenance of development as a human right, and upon the destruction of this aspect, the entire spectrum of “human rights” was denied to developing countries. Propositions, such as the Agricultural Liberalization Act, were forced upon the member nations without proper consideration of the effects of these propositions on weaker nations. Regarding the complete disregard for equity and participation during the Doha Round, India’s Commerce Minister, Kamal Nath, noted,

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“This is a Development Round. Completing it is extremely important, but equally important is the content of the Round. The content has to demonstrate new opportunities for developing countries, primarily market access of developing countries into markets of developed countries. This Round is not for perpetuating the flaws in global trade especially in agriculture, it’s not to open markets in developing countries in order for developed countries to have access for their subsidized products to developing countries.” (Walden, 2006)

Most developing nations agree that the Doha Round failed to “correct the structural flaws and disorientations” of the current trade system, and in that sense, failed in the exact purpose for which such forums are created. As noted in The Declaration, more important than free trade is fair trade.1 It is the WTO’s prime responsibility to ensure this through negotiations such as the Doha Round. Yet, at the conclusion of this round, developing countries had yet to see such fair trade.As far as agriculture discussion is concerned, developed nations pushed to open developing markets while providing minimal concessions. While the European Union did agree to phase out its export subsidies, it demanded radically reduced tariffs in developing countries’ markets for this minimal concession (Walden, 2006). In addition, the U.S. “appeared determined to eliminate any protection for developing country farmers” (Walden, 2006). U.S. representative Susan Schwab attacked the provisions for various “safeguard mechanisms” that had already been institutionalized the year before. These mechanisms would allow governments to slow down the erosion of local government by increasing tariffs on subsidized goods. By the conclusion of the round, little had been accomplished to aid farmers in developing nations. One Philippine official stated, “Our agricultural sectors that are strategic to food security and rural employment have already been destabilized as our small producers are being slaughtered by the gross unfairness of the international trading environment. Even as I speak, our small producers are being slaughtered in our own markets, [and] even the more resilient and efficient are in distress” (Walden, 2006).

The agricultural policy that was established during the Doha Round is further discussed in the next section.

1

High Commissioner for Human Rights: The Declaration on the Human Right to Development (World Trade Organization). Also see Faizal (2005) for a detailed failure of the Doha Round.

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S.N. Gajanan and Prerna Soni

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3. Agricultural Trade Liberalization The WTO’s recent Agreement on Agriculture (AoA) regarding Agricultural Trade Liberalization, clearly violates Articles Two and Three of The Declaration t, which state that “the human person is the central subject of development and should be the active participant and beneficiary of the right to development” and that “states have the primary responsibility for the creation of national and international conditions favorable to the realization of the right to development” (see footnote 1) respectively. The AoA also denies the access of capabilities referred to by Sen (1998), in the context of “famines”, and the AoA further disregards the necessity of “equity and participation” within the dictum of “The Human Right to Development” (Sengupta, 2004). The WTO defines liberalization as a process that, “involves providing greater market access to foreign firms by lowering the barriers to trade” (Hoekman, Mattoo and English, 2002). However, liberalization is not to be confused with deregulation. “The focus of deregulation is to reduce the total amount of state regulation…while that of trade liberalization is to ensure that existing regulation does not discriminate against foreign participation in the market” (Soros, 2002). Although liberalization would ostensibly broaden access to international trade markets, this has not been the case for all parties. Hoekman, Mattoo and English (2002) indicate that liberalization was designed with the intention to benefit developing nations, and while this intention was well-intended, the deliverance of this promise has been empty. Often, industrial countries benefit, while developing countries suffer. “This perception is based on the observation that many services sectors are human capital-intensive, physical capital-intensive, or both – which means that industrial countries will have a comparative advantage and will dominate any trade after liberalization” (Hoekman, Mattoo and English, 2002). There are several aspects in which the AoA fails to meet the needs of independent, smallscale farmers (Smaller, 2006). Firstly, most independent farmers in developing nations produce food for local consumption, and only about ten percent of it is traded internationally. Therefore, liberalization of exporting markets fails to directly benefit the independent farmer, and so the export markets are limited to the few large-scale agricultural corporations. Secondly, the mere availability of export markets does not guarantee the accessibility for small farmers. The said liberalization policy demands several high international standards for agriculture. So while independent farmers have the prospect of using these markets, it is very unlikely that their exports will be accepted. Therefore, the AoA proves to be inefficient by actually limiting the exports of developing countries. Thirdly, liberalization makes domestic markets of developing nations susceptible to overly aggressive foreign importation and influence. Often the developed countries practice “dumping”, that is, maintain artificially high levels of production, and sell their surpluses abroad at prices below the cost of production. Dumping can be caused by either a state’s direct payment to its exporters – export subsidies – or by transnational commodity traders who use their market power to decrease the prices they pay to farmers, thereby increasing their own profits. In either case, it is the developing countries’ import markets and their small farmers who receive the brunt of the blow. These low imported prices crush domestic production and hinder the prosperity of small farmers.

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Finally, it is difficult for most people to benefit from the AoA because the majority of the world’s agricultural market is dominated by a few corporations. Smaller (2006) notes that in 1986, about 85% to 90% of the world’s agricultural trade was controlled by a mere five companies. To make matters worse, these companies are often the beneficiaries of billions of dollars of state subsidies, which enable the conglomerates to maintain and intensify their hold on the global agricultural market. Together, these four aspects of the Agricultural Trade Liberalization Act give large corporations of developed countries a distinct advantage over independent farmers in developing nations. WTO rules neither prohibit dumping and excessive export subsidies, nor do they grant developing governments the authority to regulate their own markets to prevent it from affecting them. This has been evident in at least two specific cases: Case 1:In Ghana, agriculture is a vital part of society and the economy. WTO policy required Ghana to reduce its subsidies to local farmers producing tomatoes, rice, and poultry. Meanwhile, through liberalization, Ghana was forced to open its markets to accept imports from abroad. The lack of domestic subsidies and the importation of low cost produce stifled local farmers’ competitiveness in Ghana’s market, as consumers chose the cheaper, imported goods (Smaller, 2006)

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Case 2:A similar situation occurred in Zambia in 1990. Although this was prior to the creation of the WTO, it clearly demonstrates the adverse effects of liberalization. Liberalization of maize caused the producer price to fall and the consumer price to increase. This led to a 20% drop in the consumption of maize, and several of the human rights impacts have been documented. For instance, malnutrition, mortality due to this malnutrition, and poverty increased. Consequently, the general quality of life in Zambia suffered (Smaller, 2006).

4. Trade Related Intellectual Property Rights (TRIPs): Intellectual Property is generally understood as the entitlement of specific, intangible ideas or information. George Soros points out that, “the very expression ‘intellectual property’ is very misleading because it rests on a false analogy with tangible property. An essential feature of tangible property is that its value derives form the use that the owner makes of it, but intellectual property derives its value from the use that others make of it: Authors want their works read, inventors want their inventions used” (Soros, 2002).

WTO rules concerning TRIPs are highly restrictive and often diminish smaller nations’ social and cultural values, which are necessities towards maintaining human rights in development. After all, Development is more than simply an economic factor, but in fact one that is social, political, and cultural (Sengupta, 2004) One particular rule that is designed to prevent countries from discriminating against foreign suppliers is the imposition of greater production regulations. In practice, it makes it difficult for independent countries to impose their own environmental, labor, or human rights standards. WTO policy always takes precedent over independent policy. For instance, the

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S.N. Gajanan and Prerna Soni

International Labor Organization (ILO) created a set of conventions concerning human rights and production. ILO member countries wished to impose sanctions on Mynamar over forced prison labor (Soros, 2002). However, this penalty conflicted with the WTO’s nondiscrimination policy. Note that this conflict corrupts, “human rights and cultural values” of these nations, by negating forced labor. Similarly, if a country wished to create a domestic policy that somehow conflicted with the WTO’s policy, it, too, would be overridden. This policy, therefore, limits the innate sovereignty of developing countries, violating Articles Two and Three of The Declaration which state that, “States have the right and the duty to formulate appropriate national development policies that aim at the constant improvement” and, “States have the primary responsibility for the creation of national and international conditions favourable to the realization of the right to development,” respectively. Combined, the resulting lack of international regulations and the obstacles to domestic regulations favor corporate interests. Often, the cultural rights of smaller nations may be sacrificed in favor of corporate growth. Despite lacking the status and capital to fund corporate powers, developing countries are often rich in the biological resources, and traditional knowledge that are vital for these corporations to succeed. Hence, developed nations manipulate these developing nations and their resources. This is evidenced from a remarkable case study with regards to “biopiracy” and litigation. In 1997 the United States, with encouragement from the WTO, pursued the patent of medicinal uses of turmeric and neem in India. In order to receive such a patent, corporation proposed “novel” uses of these plants. Ironically, such uses have been in existence in India for centuries, and novelty was certainly not the case (Shiva, 2006). After the issue of the patent, this indigenous plant could no longer be used without the approval of an outside force. Two years later, after great unrest from Indian scholars and human rights activists, a case was filed against the patent, calling two issues into question: the classification of this as a “novel” approach and the bias of the WTO in favor of the United States (Slack, 2006). India won the case, and such an action was deemed as “biopiracy”. The patent defied the cultural aspect of development rights, as outlined by Sengupta (2004), as well as Articles Two and Three of The Declaration. Had the U.S. succeeded in the patent of turmeric and neem, however, Indian producers would have been prohibited from using their innate cultural knowledge, for their betterment.

5. Conclusions In order for the WTO to fully comply with The Declaration on the Human Right to Development and the commonly accepted philosophies regarding development, it must develop policies that are “people-centered,” rather than “economic-centered”. Unfortunately, in practice, the WTO has failed to implement the necessary steps needed to maintain the quality of poor sections of the global community. The various agreements within the Doha round, their fall-out in terms of Agricultural Agreements, and Trade Liberalization pacts, have in fact shown, beyond reasonable doubt that rich corporations and weak governments dictate WTO from behind the scene. The “capabilities-approach” developed by Amartya Sen (1998) must be given serious consideration by the WTO to address the problems of the people of developing nations. At the

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very least, WTO policy should not hinder the state from providing these “capabilities”. Policies should also be instated to prevent the manipulation undertaken by developing countries, multinational corporations and developed world-powers. With proper, equitable policy, the WTO will help progress not only economic development of poor countries, but can create a background for more global co-operation towards cultural and political development, as well.

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References Bello, Walden. (2006) “Doha Round collapse best for developing countries.” Inquirer.net http://opinion.inquirer.net/inq7viewpoints/columns/view_article.php?article_id=11543 Faizel, Ismail (2005), “A Development Perspective on the WTO July 2004 General Council Decision”, Journal of International Economic Law, Vol 8. No.2, 377- 404. Gardner, Richard, and Millikan, Max F. (1968) The Global Partnership. New York, NY. Fredrick a. Praeger. High Commissioner for Human Rights. (2006) Declaration on the Human Right to Development. World Trade Organization. Also see http://www.unhchr.ch/html/menu3/b/ 74.htm. Hoekman, Bernard, Mattoo Aaditya, and English Philip (2002) (Edited). Development, Trade, and the WTO. Washington D.C.: The World Bank. Sengupta, Arjun, (2000), “Realizing Right to Development.” Development and Change, Vol 31, 553-578. Sengupta, Arjun, (2004), “Human Right to Development.” Oxford Development Studies, Vol 32, No 2, June, 179-203. Shiva, Vandana (25 Nov 2006), Third World Network. http://www.twnside.org.sg/title/turcn.htm Slack, Alyson (2006), "Turmeric." In Trade and Environment Database Case Studies. http://www.american.edu/ted/turmeric.htm Smaller, Carin (2006), Planting the Right Seed: a Human Rights Perspective on Agriculture Trade and the WTO. THREAD Discussion Papers. Soros, George, (2002), George Soros on Globalization. New York: Public Affairs. Sen, Amartya (1984), Resources, Values and Development, Cambridge (MA). Harvard University Press Sen, Amartya (1999), Development As Freedom, New York (NY). Alfred A. Knopf

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RESEARCH AND REVIEW STUDIES

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In: Welfare Economics Editors: Paul E. Weston et al, pp. 35-57

ISBN: 978-1-60456-946-9 © 2009 Nova Science Publishers, Inc.

Chapter 1

THE INSTITUTIONS OF POVERTY Oliver Schmidt1

European Institute for Globalization Research2

Abstract

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Institutions shape the incentives and opportunities people find and create. The institutions of poverty discourage accumulations of assets, disable accountability of governance, and dilute potential. After an empirical overview of past and present prevalence of poverty and its scholarly explanations, the macro-economic conditions of poverty are outlined. At the core of the chapter is the discussion of four institutions of poverty within economies; those are lack of assets, lack of accountability, lack of income predictability, and unfavorable spatial distribution. Analyzing the four institutions concurrently will explain poverty within any one country, either low- or high-income, and will allow establishing the level and persistence of poverty in any given country. their relative weight as determinants of poverty persistence is situation-specific, i. e. differs from region to region, country to country, and social set-up to social-set-up. Selected case-studies – of worldwide microfinance, of Germany's labor market reform, of India's Rural Employment Guarantee act – illustrate the heuristic framework that this chapter proposes to students and policy makers concerned of poverty. A world without poverty means that every person would have the ability to take care of his or her own basic life needs. […] nobody would die of hunger or suffer from malnutrition. […] Everybody in every part of the globe would have access to education and health-care services […] Even in a poverty-free world where every man and every woman would earn enough to take care of themselves and their family, there would still be situations of temporary poverty due to a sudden catastrophe or misfortune, a bankruptcy or business downturn leading to failure, or some personal disease or disaster. […] But such temporary problems could be taken care of by the market mechanism through insurance […]. (Muhammad Yunus 1998) "Much about poverty is obvious enough. One does not need elaborate criteria, cunning measurement, or probing analysis, to recognize raw poverty […] identification of the poor and the diagnosis of poverty may be far from obvious when we move away from extreme and raw poverty. […] the causation of poverty raises questions that are not easily answered." (Amartya Sen, 1981) 1 2

E-mail address: [email protected] Homepage: www.e4globe.org

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1. Introduction When we see a young mother begging, her baby in one arm; when we see a bunch of dirty children, bare-feet and hardly dressed, walking to the well, or cutting stones, or playing in the dust next to their dweller parents' huts, or being cramped together in a mud school room without real windows, nor blackboard, nor notebooks; then we know what poverty is. Despite the striking obviousness of poverty, economists have ever struggled to find common ground in describing poverty, let alone agreeing on the best way to get rid of it.

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"The experience of teaching the section on poverty in a public economics or development economics course is usually quite a letdown. After admitting the great importance of the topic, the typical course starts by devoting a substantial amount of discussion to different ways of measuring poverty. This followed by a review of statistical estimates of poverty. Finally some policy issues are discussed: the scope and coverage of safety nets, whether transfers should be cash or in-kind, targeting and problems of work disincentives. […] Conspicuous by its absence is a coherent analysis of what causes poverty in the first place, its implications for the functioning of the economy, and the persistence of poverty into the future." (Mookherjee 2006)

The reason is that poverty implies a standard. A standard is a benchmark, or threshold, or cornerstone. The cornerstone divides inside from outside; the threshold divides performance from non-performance; the benchmark divides excellence from mediocrity. A standard always carries a value statement. Value statements are of axiomatic nature. They cannot be proven – but they can be disputed for ever. Poverty implies a negative standard; i. e. falling short of a threshold, or of passing by a cornerstone. Sen (1981, 2000) offers a balanced, comprehensive overview of both technical and programmatic issues of poverty measurement. This paper does neither intend to add to the dispute over value-statements nor to the theoretical debate about poverty-measures. Do you, dear reader, build on absolute poverty as measured by a poverty line (1 and 2-PPP-US$ are most commonly used), or do you rely on relative poverty as measured by a poverty gap (such as less than 50% of the median income, e. g. tracked by UNDP)? Surely, you have strong reasons to favor one over the other. If you join the majority of scholars and practitioners who work with a combination of both, you surely have strong reasons for your idiosyncratic blend. This paper makes a case that there are institutions of poverty applicable regardless of the choice of poverty standard. It is claimed that these institutions – a set of rules and organizations – always come to play where poverty occurs. It has been written for policy makers and students of policy making who are concerned about the institutions of poverty within economies. Also, this paper does not look at individuals that are poor. It does not attempt to describe or explain how poor people perceive themselves and their environment, how they form their beliefs and priorities, how they come to their decisions, and what goals they set for their lives and those of their dear. Policy makers and students of policy making should consider it of uttermost importance to study those individual perspectives. Reason being the following experience of development and welfare policies, programmes and their makers: First they fail to undertake any of such familiarization, and then they fail completely. Therefore, as much as this paper promises insights into the institutions of poverty, it does not claim to provide understanding of the poor. There is some little literature – often of journalistic origin – that may do so, and the reader is strongly advised to consult it (e. g. Blasberg 2007, Economist 2005, Shipler 2004, Sainath 1996).

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This paper argues that, under the assumption of absence of distortions from macroeconomic conditions, poverty persists

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a) by preventing people from accumulating a mix of assets such as land or other physical means of production, or human capital, or some social network; and b) by disempowering actual and potential asset-holders from claiming, accessing and applying accountability over the way their surrounding – their "livelihood" – is governed, be it companies, local or other government agencies, education and health care organizations, etc; and c) by the pattern in which empowered actual and potential asset holders are distributed in space, i. e. if they live in central or remote settlements, and finally d) by the extent to which empowered, favorably densely settled, actual and potential asset-holders are capable to predict their income over several succeeding periods, and to which extent those predictions promise comparable income levels for those periods (that means the income is not subject to volatility). In low-income-countries, rural and urban day laborers, smallholder farmers and slum dwellers do not get the chance to accumulate assets; they do not enjoy education, in that regard often following their parents' footsteps and setting their children onto the same path; their children (and sometimes wives) being numerous is one of the important handicaps of their accumulating assets; also, their social networks are regularly shattered and weak (having more than one wife is likely to add to that); the set of rules which they subscribe to – like being additional or informal wife; or like living in a formally illegal squat – deprives them of accountability, and information, and often access to quality public goods like health care and education. They have to content themselves with income options that are strongly unreliable, and when faith strikes – like injury, or malady, or school fees, or family events (marriages, funerals, religious festivals, etc) – they are subject to the mercy and credit of their rulers and thus driven further into a trap with no way out. In high-income-countries, those who fall out of employment or miss the entry-point – examples are school-drop-outs, under-age mothers – often find their assets deteriorating; they stop accumulating knowledge and skills, they are cut off "uplift" social networks, they find it hard to maintain properties. The latter is accelerated if the rules of social transfers encroach on physical assets such as housing, transport, savings. Facing such situations makes them slip into the shadow economy; and they are driven away from voicing their interests in the governance of public affairs, in particular the social benefit-system they are subject to. This paper makes a case that these four institutions – in order of importance: assets, accountability, habitat structure, income predictability – do explain exhaustively poverty within any one country, either low- or high-income, and that their analysis for any specific country will allow establishing the level and persistence of poverty. The paper organizes as follows: Section 2 presents a brief outline of poverty and its study throughout human history up to today. Section 3 highlights macro-economic drivers of poverty. Sections 4 to 7 examine the four institutions of poverty as given above. Three exemplary policy interventions which cut across the four institutions of poverty are presented as boxes at the end of section 4, 5 and 7 respectively. They are the 2005-Rural Employment Guarantee Act in India, the 2003-labor market reform in Germany, and the provision of Microfinance schemes all over the world since the mid-1990ties; the choice is at the pure discretion of the author. Section 8 concludes.

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2. A Brief History of Poverty Throughout its time, mankind has seen periods of thrive and periods of suffer. The bible (Gen 41) accounts "7 years of abundance, followed by 7 years of famine" to the making of Jahwe, the god of the Jews. It also records that the peoples of Egypt sailed safely through that period of famine by the making of government. That is, the ruler of Egypt entrusted his Jewish advisor Joseph, who in turn says to have got a hint from Jahwe, to head the Egyptian administration in taking pre-cautionary measures. Empirical research on the 19th and 20th century strongly suggests that popular vote rather than divine spin-doctoring is the most effective lever to avoid poverty in one of its most inhumane and brutal guises, that is famine (Sen 1981). Poverty can be traced back throughout several thousand years of human history. Government intervention has been proven critical to the manifestation of poverty at all times – something that can not be said about divine intervention. Since mankind started opting for cultivating the lands rather than roaming them as hunters/gatherers about 10,000 years ago, periods of spreading poverty were obviously and directly driven by success and failure of harvest. Crops might not get enough water, or sun. Crops might get too much water, or too much sun. Crops or seeds might fall prey to plagues of insects, or bacteria, or fungus. If any of these happened, the cultivating people were bound to suffer poverty. They had to eat scarcely, they were more likely to fall sick, they might be forced to trade some of their possessions for food, or to abandon their lands and move somewhere else; and they faced increased probability of unlucky campaigns of war from which they might eventually loose part or all say in governing their own affairs. On the other hand, successful harvests were correlated with population growth; growing populations could only be sustained by expanding cultivated lands. Cultivatable lands, initially, were a fixed factor of production; they were more available in some regions than in others; this is witnessed by the spatial distribution of the grand civilizations of ancient times: Along the great rivers of Yellow and Yangtze rivers, Indus and Ganges, Euphrates and Tigris, Nile and Niger. The economics of Thomas Malthus predict that the constraint of food will constrain the capabilities of people: Unless they subscribed largely to abstinence (which Malthus himself found impracticable to practice: He fathered 3 children), the interplay of reproduction and constraint food supply would settle to equilibrium of misery (Suntum 1999). Malthus' theory might be counted among the most successful of all times: "Over"-population features prominently on many policy makers' and poverty scholars' minds. It is an elegant model, and it is intuitive. It is also very unrealistic. If it were realistic, mankind would never have thrived as builders of cities and empires with fortunate lives for many. Nor have the fruit of wealth ever been reserved to particularly abstinent people. Landes (1998) argues, though, that comparatively lower reproduction rates in Europe favored the accumulation of assets, and thus European countries grew wealthier than non-European ones. Recent empirical studies indicate a (significantly) negative relationship between population growth and per-capitaincome for some decades of the 20th century but not for others (Eswaran 2006). There is an unlimited opportunity of technologies – not just one ("abstinence"). Inventive minds found many ways of expanding a given land's harvest; innovation in agriculture is traced back towards medieval times at least. Thus in a long-term perspective land ceases to be a fixed factor. Moreover, cities are the tangible evidence of Malthus' failure to model reality meaningfully. Cityfolk strive on economic activities other than farming: Craftsmanship, trade, manufacturing, logistics

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and gastronomy, finance, education and arts, administration and judiciary. Cities are built on Adam Smith' principles of specialization and division of labor; they are the places were the critical mass for such ventures first springs up; with transport costs being one of the critical drivers, as Heinrich van Thuenen first modeled, around the time of Malthus (Suntum 1999). Mokyr (2006) argues that systematic creation of "useful knowledge", knowledge which is scientifically vetted and transformed into factors of production, occurred only in the aftermath of the enlightening (18th century), and gave way to growth of wealth through the first industrial revolution (steam engine and electrification). Weber (1980) argues that the formation of European cities and their being governed relatively independently from aristoautocratic rulers was paramount to the process; Russell (1946) emphasizes the disintegration of the quasi-divine-autocratic rule of the Roman church led by one pope into many Christian churches led by various regional rulers. While Post-medieval-Europe thus enjoyed spread of a more libertarian governance which eventually paired with strong accountability of rulers towards their subjects, the realms of Islam – which in medieval times had diminished poverty more successfully than Europe – faced the opposite: Knowledge and hence innovation was actively discouraged, and governance grew more autocratic and exploitative (Landes 1998). Poverty tended to be rural while urban people enjoyed a high probability of being welloff, or of leaving poverty behind within one or two generations. Since 2007, one out of two humans around the world lives in an urban area. As low income-countries will soon be home to the biggest cities of the world (e. g. Dhaka, Bangla-Desh or Laos, Nigeria) the face of poverty urbanises as well. Up to half of the urban folk will be living in slums. In Africa, the urban poor account for about 70% of the urban people. The number of slum dwellers increases by 27 million annually. Poverty, manifested in malnutrition, poor health and also exposure to violence is rampant among slum-dwellers. For example, in Ethiopia, child malnutrition in slums and rural areas is 47 per cent and 49 per cent respectively, compared with 27 per cent in non-slum urban areas. In Brazil and Cote d’Ivoire, child malnutrition is three to four times higher in slums than in non slum-areas. E. g. in Kenya, Tanzania and Zambia, HIV prevalence is significantly higher in urban areas than in rural areas.1 6000 5500 5000 4500 4000 3500 3000 2500 2000 1500 1000 500 0

Year A.D. 01

5002

1000 3

1500 4

1800 5

1870 6

1900 7

1950 8

2000 9

Source: Sachs (2005), Bourguignon/Morrison (2002), own presentation.

Figure 1. World Average per Capita Income. 1

The data displayed in this paragraph draws on the "State of the World’s Cities Report 2006/7"-report from UN-Habitat. For further details, see e. g. Schlein/Krueger (2006).

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The data that is available today suggests that per-capita income stagnated throughout most of mankind's history (figure 1). From this view derives that most people were poor before the first industrial revolution and urbanization spread; through the first industrial revolution, most people in Europe and Northern America, and later to some degree in Asia and Southern America, got well-off. There are a number of question marks to that highly aggregated view. A closer, more detailed perspective unveils a lot of striking differences of well-being throughout all times and places. At their better moments, empires allowed more strata of society to accumulate assets and to enjoy relatively predictable income streams; also, central government's ability to interfere with local communities and individuals was much more limited than it is since the 20th century (Russell 1934), thus a certain degree of participation in local governance was available. E. g. in the Roman Empire, in the city-states of Italy, in the realms of Islamic globalization which at its high point stretched from West Africa up to India, in the Indian empires and in stable times of the Chinese empire, people enjoyed times of prosperity. Other examples are the constituencies of Maya and Aztec rule: They were relatively well-off, not least were their public sanitation facilities (and corresponding habits) superior to those of the incoming Spaniards. Poverty came upon these people with the Spanish rule which robbed them of their assets and reduced from little to zero their say in their being governed. Subscribing to the new rulers' religion did not prevent them from the faith of poverty. The development path of Middle and Southern America, with more often than not dissatisfying economic achievements and spreading poverty, can be traced back to Iberian exploitative strategies which shaped unfavorable asset, governance and incentive structures (Easterly 2006); turning their comparative wealth in the 17th century into poverty in the 20th century.2 However, it appears fair to say that periods of wealth were limited and interrupted by periods of peril and spreading poverty. Also, more often than not did those entrusted with public governance fail to provide conditions of prosperity; instead they extracted from their constituencies decadent wealth for few, and for a desire of waging war (see e. g. Tuchman 1978). The art of war (or banditry) is a non-agricultural economic activity which precedes the cities. In a world of settlement rather than nomads, there was always an alternative to plowing the soil or inventing any other ingenious way of putting factors of production together. That is to take it by force from those who have done so. Warfare to create income streams was always very critical in sedentary societies. It provided a lever to expand the own constituencies' scope of either farming or otherwise producing themselves, or of having others parting of a share of their farming and producing. And it provided a lever to prohibit others from expanding their claims over the own production. The nature of warriors is that they easily forget to differentiate between the two, and that they become a social group of their own which puts a strain on all others who thus have to factor their existence into their plans, one way or the other. Societies prospered that struck a balance between armed forces capable of defending but incapable of extracting unreasonable rents from their (non-war) enterprises. Societies that failed to strike that balance shrunk their geo-strategic role like Spain in the 16th, the Netherlands in the 17th and Great 2

"In 1700, product per head in Mexico was worth about 450 U.S. 1985 dollars, in the colonies that would become the United States, product was somewhat larger, say $490; and in the booming sugar colony of Barbados, the figure was substantially higher, $736. Onne hundred years later, Mexico was still at $450, and the United States was at $807. By 1989, the United States had drawn far ahead: GDP of $3,500 for Mexico, $5,350 for Barbados, $ 18,300 for the United States." (Landes 1998:292)

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Britain in the 20th century; or fell into misery like the mentioned Middle- and South American civilizations, or India in the 19th century, or Liberia and Sierra Leone nowadays. 1,500,000

1

1,200,000

0.75

900,000 0.5 600,000 0.25

300,000

0

0 1820

1870

1910

1950

1992

2001

Number of people living on 1 US$ PPP (left i ) of Population below 1-US$-PPP (right Share i )

Source: Bourguignon/Morrison (2002), Worldbank (2008a), own presentation.

Figure 2. Absolute and Relative Poverty Count. 1

0.8

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0.6

0.4

0.2

0 1820

1870 Inequality within country-groups*

1910

1950

1992

Income-Share (World): Bottom 20%

*Africa; Japan/Korea/Taiwan; Other Asia; Latin America; Eastern Europe; Western Europe Source: Bourguignon/Morrisson (2002), own presentation.

Figure 3. (In)Equality-trends.

Thus, the history of poverty in a nutshell is like a ride of regions and/or socially or professionally composed groups on the "wheel of Fortuna"; only that the ups and downs are largely man-made, though often not consciously or by intend. The outstanding story of shrinking poverty on a large scale is told by the first industrial revolution. The impressive relative alleviation of poverty did only weakly reflect in absolute numbers, because the same

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period saw a constant, so-far-unknown expansion of human population (figure 2). The second half of the 20th century, which might be related to the second industrial revolution (information + communication technologies) saw the poverty trend stagnating and inequality rising again (figure 3). In a regional perspective (figure 4), poverty today is overwhelmingly located in India and Sub-Sahara-Africa, where 1 out of 3 poor live; about 1,400m in 2004. China reports as flagbarer of successful poverty alleviation, with the absolute number of poor falling from 819m to 452m (1990 and 2004 respectively; expected number for 2015 is 186m). In other East/South Asia and Europe/Central Asia/North Africa/Latin America respectively, by 2015 absolute numbers are expected to fall by 235m and 70m. Among others, this will level a 1990ties-peak of poverty in the former Soviet-Union. It is noteworthy that these regions are not expected to significantly reduce their share of the world's poor, although they mostly report falling and sometimes close to stagnant population growth.

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3. Macro-economic Conditions of Poverty Where there is poverty, there is government failure. Government ability to identify poverty risks in time and to implement policies to mitigate those risks is paramount. Today, there is nominally no reason that anybody should not access adequate calorie intake. The agricultural capacity is more than sufficient to support the biggest human population ever. However, the nations' distribution systems do not reach everybody as they should, for reasons beyond environment. E. g. the current rise of food prices is among others3 driven by changed diet which again is driven by changed economic conditions. Millions of Asians enjoy increased disposable income, and they spend it on extended meat intake. Meat production accelerates wheat and soy bean demand. As production does not expand in the short run, prices of wheat and soy beans rise, and all food made of it – the food for animals as well as that of people (Economist 2007). Whereas details and priorities of economic growth and equality, of monetary stability and financial system remain disputed among economists and policy-makers, there is growing consensus that alleviation of poverty demands macro-economic stability. Surely, substantial long-term economic growth is necessary; but most scholars agree that it is not sufficient. Deaton (2006) reports that during the 1990ties poorer strata of population did profit underproportionally from economic growth. Kaempke/Pestel/Radermacher (2003) show that the degree of equality itself is correlated with the prosperity of an economy. They find a Ushaped relationship; that is people fare worse in very equal and very unequal economies. Kawachi/Kennedy/Wilkinson (1999) show that people who live in highly unequal economies are less healthy than people who live in more leveled economies. A reliable monetary system is critical. High inflation is particularly hurtful to middle- and low-income people. They have little or no opportunity to diversify their portfolios, e. g. buy inflation-robust assets such as land or gold or foreign currency. E. g. in Africa, with the

3

"The increased use of food crops for production of biofuels is an important factor that led to large increases in the prices of vegetable oils and grains in 2007 which in turn contributed to an overall 15 percent increase in the index of agricultural prices and a 20 percent rise in food prices. The latter is of special concern for poor consumers in developing countries" (Worldbank 2008b:38).

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1990

Others*

China Sub-SaharaAfrica

2004 Other East+South Asia

India

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2015

* Europe and Central Asia; Middle East and North Africa; Latin America and the Caribbean. Source: Worldbank (2008b), own presentation.

Figure 4. Regional Distribution of Poverty (2-US$-per day).

second-biggest low-income population worldwide, recent inflationary tendencies are reflections of rising food prices (Worldbank 2008b). Governments have often been found to misuse their monopoly of providing money; causing inflation either more or less directly, e. g. by "printing money" (the recent case of Zimbabwe) or increasing public debt4. Such government misconduct has been limited by politically independent central banks. Since the 2nd half of the 20th century, these have been installed in most countries, adding significantly to a world-wide, long-term-low level of inflation (Worldbank 2008b). Meanwhile, in an internationally intertwined financial system, cross border flows of finance and debt became 4

Debt expands the volume of money; if the volume of money expands faster than the volume of goods and services, i. e. if debt is used for consumptive rather than productive means, the value of each money unit depreciates; hence inflation.

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sometimes causes of long-term restraint of infrastructure maintenance or investment, as resources go into debt servicing; or of acute crisis, as financial flows suddenly rush out of a country or region. Since the 19th century, such financial crises have been a fairly regular feature; since the 1980ties, international financial markets with prior unknown volumes of short-term financial flows are one of the dominant characteristics of globalization (for details, see e. g. Stiglitz 2006, Schmidt 2005). Beyond a certain balance of the above, peace, law and order are paramount. Wherever people have to fear for their houses and businesses to be looted and their homes and lives to be violated and destroyed, poverty will ultimately spread. About 3 out of 4 of the world's poorest live in acute or post-conflict countries (Collier 2007). Economic stagnation, spreading poverty and violent conflict oftentimes form a trap from which a country cannot escape out of its own effort and even spreading the evil to its neighbors; the Darfur-crisis (involving Sudan, Chad, Central-African Republic) just being the most recent example. Accordingly, Diamond (2005) argues that hostile neighbors are a core factor5 of prosperity or decline of people and their economies. The latest addition to the list of macro-level poverty risks might be environment. Indeed, poverty could be written as a story of failure to manage environmental resources accurately. Diamond (2005) shows how human civilizations ultimately fail to prosper if they fail to accurately assess and manage the natural resources available to them. With human population peaking at about 10 billion, stretched to practically all habitable corners of the planet, insight is growing more urgent that this risk might have to be addressed through the first truly global framework. Meanwhile, let us assume macro-economic conditions settled and turn to the institutions of poverty within each country.

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4. The First Institution of Poverty: Lack of Assets Physical assets are land and immobile facilities such as gardens and forests, buildings and machines. Mobile physical assets are vehicles and tools. Examples are mobile phones, laptops and their various hybrids as well as handheld devices, e. g. juice presses, shoe-repairing-sets or handlooms. The capability to accumulate physical assets is determined by the system that governs property rights. Those are the rights to purchase, transform (including destroy) and sell an asset and to receive income generated from it (e. g. selling juice produced with a juice press, or receiving a rent from lending out the fruit press). In many countries many people do not have formal property rights of the place where they and their families live (land title), and they do not have formal property rights of their businesses (license). Whereas the costs to secure formal property rights are prohibitive, these people are vulnerable to property extraction, either through corruption (bribing), or through sudden raiding, e. g. tearing down of informal (i. e. "illegal") settlements. Furthermore, informal property rights and assets respectively cannot be "capitalized", that is put in as collateral for loans (liquid funds) which can be invested in maintaining, upgrading or expanding of the asset portfolio (De Soto 2000). 5

The other interacting factors being (i) the damage that people have inflicted on their environment; (ii) climate change; (iii) changes in friendly trading partners; and (iv) the society's political, economic and social responses to these shifts. This list of 5 (including hostile neighbors) groups of factors is based on heuristic approach (Diamond 2005).

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Immaterial assets are information and skills. Information is a set of facts that are relevant to making a decision in a given situation. E. g. the prices of peanuts on different days and at different locations are information relevant to the decision when and where to buy or sell a stock of peanuts. Skills could be understood as “hands-on” information; relevant to the production of tangible or intangible goods. The skill to search the internet is relevant for producing a report, or a presentation; the skill to handle a juice press, or shoe-repairing-set, or handloom is relevant to produce juice, or repair shoes, or weave towels or table cloths. Information and skills can be analyzed from the property rights perspective, as far as upgrading and "selling" of labor is concerned. However, the chances for such upgrading are to a lesser degree determined by the risk of extraction, as in the case of physical assets, but by the cost of access. Many countries fail to provide free or low cost education. Many of those who formally do, provide it at such low levels of quality that it is close to worthless. Building a system that grants access to education and skill-training at a given quality at subsidized prices depends on governance structures, hence assets and governance are interlinked. The latter will be discussed in the next section; note however that there is a high risk of a vicious circle here: Low access to information and skills results in low accountability of education system governance results in persisting low levels of information and skills. Social assets are networks such as relatives, workmates, members of the same church, supporters of the same soccer club, or political party, people who share the same interest such as music, or swanking, or drinking. Social assets appear to be less variable than others. However, people have always made new friends, formed new clubs or parties, or joined new churches. Social assets, sometimes dubbed "cultural", tend to be mystified both as refuges against the harsh winds of socio-economic change, and as chains tying people to some backward ways (Sen 2006). There are people whose major asset is their being member of a certain community; and sometimes such communities tend to be poorer than others. There may be habits in such communities that hinder accumulation of assets; regularly they hover around suppression of women. However, suppression of women spreads far beyond a few backward communities; in fact, regularly women are denied equal property rights as men, e. g. purchasing land or inheriting family properties. At the core of community-specific variation in poverty levels is a lack of opportunity to diversify assets. If alternatives do not present themselves, it would be pure gambling to loosen the ties to the only social network available. Note that comparable cases are made and observed for other categories of assets (think e. g. of the case of sugar plantations in Carribean countries like Barbados; see footnote 2). There is an element of the same vicious circle described above – low access to material and immaterial assets results in lack of opportunity to emancipate from the pre-dominant social network results in low access to material and immaterial assets. Again, this is strongly interlinked with the accountability of governance structures, here the social network in question. Take the example of the Mahar, the "untouchable caste" (Dalit) from which came Bhimrao Ambedkar who was India's first minister of law and principle author of its 1950-constitution. Ambedkar was a leader on whose agenda education came second to nothing; such was this priority that he led the Mahars to convert to Buddhism. Consequently, many of today's Mahars have evolved from poverty. However, this holds mainly true for urban Mahars; rural Mahars continue to hover at the "lower end of the ladder", both economically and socially, last but not least Buddha is worshipped alongside any other Hindu deity (Luce 2006, pp. 111/112). This example shows how the social network and its leadership matter for creating opportunities, but how access (to

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education for villagers) and habitat structures matter just as well. Oftentimes, communities are not blessed with wise leadership like the Mahar. Rather, they display autocratic governance, with its leaders taking advantage of their flock. Many rural poor fall short of all three kinds of assets. As day-laborers, they depend on the means of production available at the employer, such as forks and hoes and the like. Beyond general peasant skills, such as digging, molding, harvesting they have no access to information and thus little chance to expand their skills. Sources of information are scarce in the countryside, e. g. newspapers and internet are not always available; so aren't training infrastructures. Many small-scale farmers command land, but are otherwise restricted as are the day-laborers, and thus the income is poor, as is the capability to expand it. Slum dwellers are short of all three kinds of assets; indeed many of them are rural poor turned urbanites. Thus, most of them do not command of physical assets for production, including shelter for themselves and their families. Furthermore, most of them command very little information and skills relevant for urban strive. They rarely access systematic training and are often only semi-literate. Even if they are literate, newspapers and the internet that could be turned into information are regularly not provided in their vernacular language. Thus, they have to carve a living out of activities of lowest capital intensity. Examples are rag pickers, day laborers who move about stuff by digging or decomposing (e. g. stone cutting) or carrying it (often on their heads). Those with more complex skills can repair to activities like hawking, household work or simple craftsmanship, e. g. washing, ironing, embroidering of clothes; or become construction workers. Those who manage to further expand their line of skills and to combine it with some physical assets may establish themselves as petty traders, or bicycle/handcart/motorcycle/rickshaw-drivers or even craftsmen specialized in repair and or installation of electric or wooden or other facilities. In high-income-countries, social transfer rules often constrain explicitly the beneficiaries' capacity to build up physical assets. They usually demand that social transfer should be the last resort; therefore, whatever physical assets somebody commands should be liquidated and lived off before transfer is granted. The rationale appears quite obvious, as taxpayers would not care to subsidize a person that owns say a house or a big car or a plot of land. However, an effect of that rationale is that either a huge bureaucracy is needed to enforce it at a level that at times might look ridiculous, e. g. regulating ownership of a TV-set, or the number of pairs of shoes, etc. These issues arise because the practical line is tricky. E. g. why should somebody own a 10,000 US$ TV-cum-music-set, if his rent is covered by his hard-working neighbors (through the social transfer system)? In most high-income-countries, some kind of TV is counted as essential. It is observed that low-income-people in high-income-countries (such as social-transfer-recipients) spend significantly more time in front of the same than others. Any conclusions from that observation have not been studied empirically for cause and effect. More importantly, low income in high-income countries is significantly and directly correlated with low command of immaterial assets, i. e. information and skills. Recent research has fed a lot of skepticism about their ability to accumulate such assets by a relevant degree. Research about social mobility suggests that they often pass on their fate of lack of information and skills to their children, together with the habit of spending a lifetime in front of a social-transfer-paid TV-set. There is a challenge to get the static and dynamic effects and incentives of social transfers right; the same holds true for development policies (which happen to be paid for by the same people).

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Box 1: Microfinance and Poverty

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Microfinance is the provision of financial services on a small scale to target groups excluded by formal banks. The initial focus of Microfinance was on credit; through group lending it became possible to offer loan sizes of as low as 22 US$ (e. g. Uganda). Since the mid-1990ties, there has been a growing interest in and funding for microfinance (Schmidt 2006). Alongside came rising attention for and research into "going micro" of other financial services, particularly savings and insurance (Morduch 2006, Kilibo/Schmidt 2005). By client numbers, the demand for savings is much higher than the demand for loans; however protagonists of a "credit-led" approach take this as an indicator of lack of credit supply. Any financial service is derivative from real-sector activity, e. g. credit to buy a hoe, or seedlings, or a juice press, and savings from selling off harvested fruits, and insurance against the harvest failing to materialize. Where such activity does not present itself because of lack of opportunity – which is usually due to a blend of lack of physical and immaterial assets and unfavorable habitat structures – financial services may not make much of a difference. That is unless physical and immaterial assets or easing of the habitat structure (e. g. irrigation, or a qualityroad to the next trading centre) are provided first. However, others argue that provision of microcredit will unleash the dormant potential and thus lead to creation of assets (e. g. Yunus 1998). Evaluations and impact studies of Microfinance suggest that • All Microfinance clients are capable to save and grateful for any opportunity to do so at reasonable conditions. • Microfinance clients diversify their risks and thus reduce vulnerability to external shocks, in particular they are able to provide more regular and more years of schooling to more of their children, and they are better capable financially and knowledge-wise to handle health care. • Many Microfinance clients have been able to grow their businesses and assets. • Female Microfinance clients tend to have strengthened their say in family decisions, in particular regarding schooling and marriage of daughters. However, apart from often weak empirical foundations of these impacts, microfinance has been critized for wanting results with regard to overcoming lack of assets and lack of income security. Some argue that microfinance rather turns informal financial services into formal ones instead of expanding immaterial assets, i. e. creating new client-relationships with banks (Osterhoot 2006). Findings from India support that view; they indicate that moneylender and microfinance portfolios do not replace but rather supplement each other (Titus 2008). Also, it has been observed that microfinance rarely creates the steady income stream from employment. Microfinance tends to make self-employment more feasible, but that selfemployment usually does emerge from lack of alternative, and it does not create jobs for others than the business owner. Surowiecki (2008) concludes that "thinking that everyone is, and should be, an entrepreneur leads us to underrate the virtues of larger businesses and of the income that a steady job can provide. To be sure, for some people the best route out of poverty will be a bank loan. But for most it’s going to be something much simpler: a regular paycheck."

5. The Second Institution of Poverty: Lack of Accountability Humans are social animals. They live in groups, the family being the nucleus group. Everyday many, maybe all, affairs are framed by the institutions of the group. This includes transactions between individuals; a fact that is sometimes consciously and sometimes

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unconsciously overlooked by economic models. Property rights for acquiring assets are but one example. Think of a number of affairs that more obviously step beyond the individual sphere. These concern health care, education, local government. Governance determines how decisions are derived at about provision and pricing, access and use, expansion and maintenance of health care, education and local government infrastructures. Local government here represents a set of various rules that govern living closely together, such as roads, noise, wastage, water and sanitation, maybe public transport, communication networks. In practice, local governments differ greatly from country to country as well as within countries in their scope and organizational hierarchies. E. g. medium-size towns may be responsible for water and sanitation infrastructure, while small towns are catered for by the district.6 However, local government here is not limited to the state's administration. It includes all rules and organizations that are relevant for framing of the infrastructure services in question. In many cases, national and international development agencies are deeply involved; or the service has been privatized to national or international companies. Before anything else, the rules for living closely together are made and implemented by families. In many communities the lines between formal local government, private business and family are thin indeed. All modern economies and societies rely on principal-agent systems. That is, agents are appointed to act on behalf of principals; e. g. boards on behalf of shareholders, management on behalf of boards; parents on behalf of their offspring, clan heads on behalf of their kin, local councils on behalf of local populations; local administration on behalf of local councils; national parliaments or presidents on behalf of nations; ministerial bureaucracies on behalf of parliaments and presidents; and so on. Inherent to principal-agent systems is a degree of freedom for the agent. On a scale from zero to ten the degree of freedom cannot be zero, because then the agent would be redundant; and it cannot be ten, because then the principal would be redundant. In between, governance determines if decisions are autocratic, top-down, exclusive (i. e. closer to ten), or if they are democratic, bottom-up, inclusive (i. e. closer to zero). Different authors tend to favor one over the other; usually, the former kind of decisions are argued to be faster while the latter are argued to be fairer. It is hold here that both perspectives are probably biased. Rather, the reference should be accountability. Accountability is defined by the principle of "triple congruence" (Grossekettler 1991). That is (i) congruence of the group of recipients and the group of providers of a transaction, (ii) congruence of those tapped on by a decision and those making a decision and (iii) selection from within the electorate of those executing the decision and those monitoring the execution. Poverty emerges where provision and pricing, access and use, expansion and maintenance of health care, education and local government infrastructures are decided with disregard of triple congruence. Decisions about these areas shape the opportunities and incentives for investment and innovation that an economy provides. If some groups within the economy are excluded from these decisions, "log-in" effects are likely: Expanding participation in the decision making is likely to result in adjustment of earlier decisions; such 6

Historically, government "a la Francaise" used to be highly centralized with limited scope at the lower level, while the same level enjoyed a comparatively wide scope under government "British style". Since the 1980ties, "decentralisation" has been an important trend in French government, and since the 1990ties decentralization has been promoted by international development agencies in many low-income-countries.

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adjustments are likely to be costly to the current decision makers; thus they will resist both expanding participation in decision making and adjusting the course of their earlier decisions. All through human history, this log-in effect had to be overcome by the excluded subjects raising the cost of maintaining the status quo, i. e. putting up a good fight. This holds true, by varying manifestations and degrees, for abandoning apartheid in South Africa in the 1990ties, for suffrage to women in the early 20th century; for representation to male citizen by various degrees in Europe and America; for expanding Roman citizenship to all people of the Empire7, all the way back to the Jewish exodus from Egypt. On the one hand, many regions of the world are trapped in violent disputes over decision making, and the more violent the dispute grows, the higher the opportunity cost of compromise; so the disputants continue dragging each other downwards. This appears to have been part of the decades-long conflict in Northern Ireland, and to be part of the case between Israel and Palestine today, and behind the ethnically loaded conflicts in many countries of Sub-Sahara Africa. It can be argued that the rampant poverty of the people of Northern Korea is based on the lack of accountability of their national leadership; outside Northern Korea, many fear that this leadership would be willing to drag down any other nation if only they get hands on the means to do so. On the other hand, many regions of the world are trapped in a social fabric that suppresses any claim for accountability, and though no open violence is observed, the peace is rather sleaze – a profound discouragement of initiative, experiment and change, because all of them potentially undermine the status quo. Thus, accountability of governance is quite straightly related to the macro-level conditions of peace and law and order discussed in section 3 above. In low-income countries, daily laborers, both rural and urban, are probably the most disadvantaged when it comes to making their voice heard and to claiming accountability about public goods. They have little to no spare time to engage in such issues, because when they are not working, they are on the look-out for work. As a group, it is hard for them to accumulate clout for collective bargaining or claiming accountability, because of their precarious situation, which is often paired with seasonal or temporary migration within countries (e. g. from rural to urban locations) or even across borders. As migrants, their status is regularly informal or formally illegal. Smallholder farmers and slum dwellers who have at least a formally recognized residential status are slightly less vulnerable. However, if their income streams are volatile and unreliable, or if they face emergencies like medical expenses or rising school fees, they often slide into a debt trap which may end with their formally or factually loosing their property of land or plot. Comparable to daily laborers, such threats limit their capacity for collective bargaining or claiming accountability, if the bargaining partner or the accountable party is intermingled with the creditors. This is often the case; it is particularly weakening if the community leaders are corrupt, i. e. cover up dysfunctional provision of health care or education or local government services by preventing their flock from claiming accountability. If the vicious circle outlined in the previous section – low access to material and immaterial assets results in lack of opportunity to emancipate from the pre-dominant social network results in low access to material and immaterial assets – comes into play, community leaders are likely to go unchallenged. 7

Here, the motivation was rather to motivate the subjects to put up a fight against the empire breaking up. A long the same line, expansion of citizenship in the French and British empires can be observed, e. g. election of Senegalese representative to the Assemble national as early as 1848 – at first from realm of the French settler, though. The first African deputy was elected in 1914.

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In high-income-countries, labor unions and leftist parties and church activists were for a century-odd, with its peak in the 1960ties and 70ties, at the forefront of claiming from the providers of health care, education and other infrastructures accountability for poorer strata of society. Those strata became over the same time-period equal to urban, industrial workers. At the same time, economic growth provided everybody with rising incomes, expanding physical assets, ever expanding information and skills, and – in combination with urbanization – alternative choices of social networks. Hence, the people of these countries enjoyed a virtuous circle of diminishing poverty at a large scale. Since the 1980ties, though, poorer strata of the economy find themselves in employment and income situations that resemble those of the poor in low-incomecountries, though the degree of vulnerability is much less existential. Spreading service-jobs tend to be less stable, and the job holders are less well organized, scarcely unionized, and they feel that their interests and claims for accountability are no longer met by the governance structures available. This has given rise to left-rhetoric movements, e. g. the globalization critics, and to the revival of leftist parties, e. g. the former communist party in Germany.

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Box 2: Germany's Labor Market Reform The labor market reform in Germany was born out of persistent high unemployment rates which were characteristic of most countries of continental Europe in the 1980ties and 1990ties. In Germany, a nexus of rules provided employees with 60% (67% for parents of under-age children) of their last salary for up to 32 months and with 53 % (57%) unlimited thereafter. Also, the social security system offered an option to access early-pension from the age of 55 (formal pension-entry-age was 65). This was fundamentally changed in 2004/05, when the option to access early-pension was cut off (subsequently, the formal pension-entry-age was raised to 67). Unemployment compensation was limited to 12 months (18 months over the age of 55), and thereafter basic social transfer. This transfer is only provided if not any other job is available; and if no assets to live off are owned neither by the person nor by near relatives, i. e. children or parents (see e. g. Economist 2003). The latter rule stirred huge political turmoil. Many people felt that it was unreasonable to effectively demand liquidation of all significant properties for two reasons: On the one hand, a lifelong-employment record would be dishonored by a few years of unemployment at the end of the career and condemn the concerned person to indecent living conditions at old-age. On the other hand, people were demanded to increase their private provisions for old age (life and pension insurance), yet in case of unemployment the concerned person would be "punished" for doing so, compared to somebody who did not. Altogether, the new rules were felt to give strong disincentives for the accumulation of physical assets during the employment career. Some also argued that the rule to take up any other job put skill levels at risk, as e. g. somebody with an academic qualification might fall out of that line of occupation if employed in a low-skill-job for a while. Furthermore, the policy change had not been put before the electorate; rather, the new policy was perceived as a fundamental change of political direction. Thus, the ruling center-left parties faced a dramatic drop of popularity and membership and lost a long series of regional – and eventually national – polls. Parallel, a newly formed "Left" expanded their share in votes and parliamentary seats. It was able to draw on a newly emerging network of activists who come from a low-incomebackground, e. g. unemployment benefits or other social transfers. Latest data show that poverty is more persistent than ever in Germany, and that unemployment is its core cause (Bundesregierung 2005). The left party argues that the labor market reforms are key to this trend; liberals, on the other hand, argue that the labor market reform creates incentives to create jobs. Whichever point of view finds support, the governance structures in Germany – elected representatives at various levels of government, political parties, civil society organizations and trade unions – have provided ample opportunity to voice them and to successfully claim accountability for the policies made.

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6. The Third Institution of Poverty: Habitat Structures Among the four institutions of poverty, habitat structure looks like the odd one out. Moreover, if any odd-one is to be considered, wouldn't there be more obvious candidates than habitat structures? Think of gender, or minorities, or being African. It is not denied here that being female, or being minority, or being African are relevant features of poverty. Indeed, in most low-income-countries poverty is a deed of women. They eat less, work more, and are more often victim of violence, and nearly exclusively of sexual harassment; baby-girls are more likely to die than baby-boys (see e. g. Sen 2000). Being born as a woman increases your chance of being poor significantly (the picture looks different for recent generations in high income countries). According cases can be made for minorities, or Africans. In fact, being born as a female into a minority group family in Africa,8 and making it anywhere outside the poverty statistics (other than being deliberately overlooked), makes the odd one out. Therefore, it is undeniable that the construction of sex-based roles and perceptions called gender is often an important institution of either poverty or wealth. It is herein that the difference between the institution “gender” and the institutions “lack of assets”, “lack of accountability” and “lack of income security” lies. The latter constitute poverty “in their own right”, and they are potentially quantitative. The relationship between gender and poverty is of qualitative nature, and gender is not as such prone to poverty or wealth. Rather, certain versions of it are, if they discriminate against one gender to accumulate assets, claim accountability and secure their income stream. Thus, gender is rather an indicator of the other three. The same holds true for being part of a minority, or being African. Consider this argument being made 20 years ago; obviously, "being Chinese" would have offered itself because it was a strong indicator of "lack of assets", "lack of accountability" and "lack of income security". However, this is no longer the case (for assets and income security, mainly). Hence, whereas the gender (or minority, or African)-poverty relationship can be overwhelmingly explained by assets, accountability and income security, the habitat-poverty relationship can not. E. g. villagers might command a mix of assets (land, social network, some machinery), and might enjoy full accountability over the governance of their lives, and might have a stable income stream (say 3 harvests a year), and may still be poor. They are poor because their spatial distribution is unfavorable. They live far away from relevant centers, or the connection is barred by unwelcoming landscape, such as mountains, or sea, or desert, or swamp. Sometimes, they are barred by unwelcoming people, like marauding bandits, or just country borders. Spatial economic models (and in the case of country borders, also trade models) subsume such conditions under transportation costs. They can demonstrate – not very surprisingly – that rising transportation costs limit transaction volumes. Transportation costs are distributed quite unevenly in space, as are landscapes and country borders. Economic integration then describes efforts to level transportation costs for a given space, say a country or a region. Economic integration is driven by technology, administration 8

This is not a fully precise statement, insofar as there are a number of minority groups in Africa who are doing quite well, examples are Asians in East Africa, Lebanese and Mauritanians in Western Africa, Boers in South

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and participation.9 Habitat structures are such spatial conditions that, for a given period, cannot be altered by measures of economic integration. The empirical record about habitat structures and poverty are mixed. On the one hand, authors like Collier (2007) and Sachs (2005) argue that unfavorable geography, in particular landlocked countries and tropic-disease-prone climates, are relevant drivers of poverty. By the same token, regional integration like the European Union and comparable efforts all around the world are accounted for expanded flows of goods, services and investment,10 which are likely to decrease poverty. On the other hand, most recent empirical research dismisses geographic factors as drivers economic growth – here a proxy for decreasing poverty – and points to the institutional setting (Acemoglu/Johnson/Robinson 2006, Rodrik/Subramanian/Trebbi 2002). I. e., they argue that "habitat structures" are indeed the odd one out, and that altering institutions to overcome lack of assets, governance and income security explains poverty exhaustively. In the light of the research on the role of urbanization and the first industrial revolution (see section 2), it is suggested here the effect of habitat structures on poverty is not yet adequately described. Further research should fill in, e. g. by creating better understanding of population density and structure trajectories, and infrastructure cost relative to other cost factors, and the poverty-effects of migration.

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7. The Forth Institution of Poverty: Lack of Income Security Low income equals low consumption, low savings, and low credit-worthiness. These properties of aggregate income levels may or may not be obvious. The present concern is to make a case that the aggregate level of income is not primarily relevant to creating poverty. More important than meeting a given income level is meeting a high accuracy level of income prediction, or in brief: Security of the income stream. People need a reasonable degree of perspective about their income, both in the short run – what will I earn tomorrow and the day after tomorrow? – and in the medium run – what will I earn in the next 6 to 12 months? People who can be sure of their income in the short run can free their mind for the medium perspective and beyond. If income is volatile, savings will be

9

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Africa. Thus, a more precise statement would be "…into a minority tribe family…"; however, the concept of tribes and ethnic groups in Africa is questionable – constructed – and best avoided. Technology meant in a broad sense; that includes any new form of labor division. Deepening of labor division is driven by bigger units with more persons among which labor can be divided. Specialized functions like trade, finance and the like demand a minimum feasible size of the unit, i. e. a minimum number of persons involved. E. g. mobile phones have reduced "transportation costs", as their networks reach areas that where hitherto not served by landline phones. Administration in a broad sense includes any kind of infrastructure good. Those are goods that lower the cost of repeating a transaction. These are obvious infrastructure goods like roads, and security on the roads, but also overhead functions of corporations (e. g. accounting department) and the provision of legal framework (e. g. property rights). Local government is an attempt to make infrastructure equally available in all parts of a given space. However, the challenge lies in finance: While sparsely populated areas have high infrastructure-costs per head, the tax-volume is usually relatively low (because there are fewer taxpayers). Hence a claim for inter-spatial transfers of resources. Participation is the degree of say people have in governing their affairs. It was already pointed out in the previous section that local government is also an attempt to make the decision about infrastructure equally available in all parts of a given space. As such, it aims at preventing, or, in the case of regional collaboration of countries, reducing man-made barriers that add to transportation costs (Schmidt 2005). In fact, there is a vast economic literature studying such phenomena, and the findings differ; a good empirically based starter would be e. g. Frankel (1997).

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volatile as well. Everybody saves, regardless of income level (see box 1). If income volatility is severe, times of low or zero income will eat up savings; and re-building them needs time. From this it appears obvious that income volatility cripples not only the (temporary) capacity but also the (permanent) motivation to save. Furthermore, people who have to move places seasonably are subject to higher costs of savings products; most pointedly, informal savings are often lost. Research indicates that 10-20% of a year's informal savings are lost. The major threat is fire. Only if people are able to make reasonable predictions about their medium term income will they start to take medium term risks – like saving up or down (i. e. taking a credit) for a vehicle, or farming machinery, or better housing. If they are not able to do so, they are more likely to repair to short-term investment, e. g. an extensive contribution to a family members wedding, or to less productive, more liquid investment, e. g. jewellery. Lack of income security makes poverty, because it reflects heavily on savings and investment choices; it hampers asset building not only with regard to the savings channel but also with regard to social networks, including most significantly insurance. Last but not least, the vulnerability of volatile and unpredictable income streams undermines the opportunities of making their voice heard in governing public affairs. Both in low-and high-income-countries, public service employment, or other office jobs, doubtlessly offers higher aggregate income levels than occupations like shoe cobbling, or construction work, or carrying goods around. But particularly in low-income-countries, the difference is not in pay-per-day. It is in paid-days-per-month. Public servants and office workers are salary-earners, and those salaries ensured not only for the current month but for many months to come, because public servants are not laid off easily, if at all. This argument even holds if public servants' paychecks are delayed, which is often the case in low-income countries. This reduces income level – in any given period fewer salaries are debited than should be the case. But the office holder in question still commands reasonable income security – his position allows engaging in alternative income generating activities (sometimes illegal ones such as accepting bribes), relying on credit and insurance, while some paycheck will back him up sometime. Quite opposed to that, the before mentioned occupations are practically always contracted on a day-laborer basis. Industrialization, forging of more capital-intensive enterprises and strong accountability of governance had changed that in high-income countries. However automated production eventually eliminated most low-skill labor; the jobs of comparable skill-levels that emerged in service-industries or the "shadow economy" carry the day-laborer-risks again. The laborer can never be sure if, and where, and sometimes for how much she will work the following day. Many occupations go through bad seasons, e. g. construction in India's coastal state of Goa is halted in the monsoon season (June to September); construction in Germany is halted in the winter season (November to February). The overwhelming majority of Goa's construction workers are migrants from neighboring Maharashtra who have to leave Goa during the monsoon season; the overwhelming majority of construction workers in Germany live on unemployment benefits, sometimes (combined with) shadow economy activities in winter. So insecurity of the income stream often brings about insecurity of the whereabouts. Moreover, each day laborer alone bears the risk of their falling sick, or their dear falling sick, or the risk of their having an accident, or of their dear having an accident. One should think that people in that line of employment have a very tight insurance cover. But that is not so. In Germany, for example, shadow workers' accidents would fall out of the professional health

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insurance; however, as practically everybody is privately health-insured, it is "only" an issue of disguising a work-accident as a private one. In low-income-countries, most day laborers do not have any insurance at all. On the one hand, insurance do not know where to find them, let alone phone them. On the other hand, their employers do not feel strongly about covering them, even if a country has laws in that regard; be it India or any West-European country. The moment the day-laborer falls sick, her income drops to zero, yet the need for liquidity peaks; only savings or a social network can cushion the fall. However, the savings will only be capable to cover so many emergencies; after that, only social network will help. But how strong can the social network be of somebody who has to roam the country in hunt of a day's work? Maybe that is a reason why the Maharati construction workers bring their women and children to Goa.11

Box 3: The Indian Rural Employment Guarantee Act

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"The Rural Employment Guarantee Act, which India's parliament passed in 2005 […] is designed to cover the entire country by 2009. The law is significant because it distinguishes India's approach to poverty very clearly from that of neighbouring China, which has preferred to create jobs indirectly by stimulating high (public and private) investment in the economy. [India's prime minister Manmohan] Singh's government has not followed this path. The new law gives one hundred days of manual labour in the countryside to anyone who wants it. Since payment is at the minimum wage, which varies from as little as fifty rupees a day in some states to eighty rupees in others (between one and two dollars), it is assumed only the really desperate will take the jobs. In the jargon, the programme is 'self-selecting'. Payment can be in a mixture of cash and food. The work is almost entirely physical consisting of the type of manual labour India's poor have been requisitioned to do for thousands of years: filling in pot-holes, digging landfills, mending river embankments, and clearing irrigation channels. Judging by the results of previous schemes, notably the food-for-work programme, which successfully prevented famine in post-colonial India, the quality of the work is not the priority. […] it promises no investment in upgrading the skills of the people it is designed to help. Nor does it invest in genuine rural infrastructure, such as all-weather roads, proper electricity supply or new agricultural technologies. […] When the law was proposed in 2004, it was dismissed by many Indian and international economists as an expensive way of doing nothing to address the perennial condition of India's poor – their consignment to manual labour at miserably low levels of productivity. Yet, India's parliament passed the bill unanimously. Many skeptics believe this rare display of consensus was prompted by the opportunity for all parties to siphon off a new source of public funds. One Indian commentator even suggested the law should be renamed the Corruption Guarantee Act. It is hard to see how a scheme that requires the poor to provide twelve or more hours of back-breaking physical labour each day for just a couple of dollars will transform their conditions. If you wander around India's provincial capitals, […] you will […] see gangs of twenty or thirty labourers, squatting in rows on their haunches, moving gradually forward in a line, plucking the lawns with their bare hands. Inside the buildings there will be dozens of sweepers […]. Is this about employment? Or is it about reminding the sweeper and those for whom she sweeps who possesses status in society and who does not?" (Luce 2006, pp. 201-203/205-206)

11

Another reason might be the reportedly high quality of Goa's schools compared to other Indian states – so there is an asset aspect, too.

The Institutions of Poverty

55

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8. Conclusion For the student and the policy-maker concerned about poverty, it is very important to study the case-based literature which looks at the poor individual (see references given in the introduction). It provides insight into the reality of living a life of high risk, where severe blows are possible at any moment without much chance to see them coming; of living backand-mind-breaking hardship most of time, with rare moments of reflection, recreation and joy. Equally important for successful interventions is the understanding of the dynamics of poverty. Individual-case-documentation often does not elaborate on the change of poverty over time. But also quantitative research has scarcely addressed the causes and drivers of poverty over time (Mokherjee 2006). Institutions shape the incentives and opportunities people find and create. The institutions of poverty discourage accumulations of assets, disable accountability of governance, and dilute potential. Lack of assets, accountability and income predictability are not only expression of poverty; they also set the incentives for the future, most notably succeeding generations. Thus, lack of assets, of accountability and of income predictability have a strong tendency to reiterate themselves over time. Furthermore, they re-enforce each other. Many scholars tend to identify their "favorite", and there are many academic debates if lack of assets or lack of accountability or habitat structures or income predictability is the most important one. This is rather beside the point. All four institutions have to be analyzed concurrently; their relative weight as determinants of poverty persistence is situation-specific, i. e. differs from region to region, country to country, and social set-up to social-set-up. Note that income predictability – volatility over a given period, probability of a given income at a given point in time – is different from aggregate income levels. The latter is a rather crude though widespread cumulative ex-post-indicator of all four institutions of poverty. It does not allow for disentangling them analytically. Some may argue that the remarks of this paper are not new; others may feel that as a heuristic approach they lack theoretical clout. Both views are accurate. Poverty is not new, and nothing terribly new has been said about it for a long time.12 The failure of social sciences to develop a consistent and empirically conclusive theory of poverty is striking. They might be excused on the grounds of a missing grand theory of social and economic change; in such a theory, persistence would just connote a low degree of change. However, the policy maker is not concerned with grand theory, particularly with grand theory which has not yet come to exist. The policy maker is well advised to draw on a fairly balanced and volume-wise manageable account of experiences and observations. Surely, heuristics embed the a-priory choice of the author which as such is subjective. But then, all reason is based on a-priori-assumptions. It is in the eye of the beholder, i. e. the reader, to judge if this paper presents a fairly balanced and volume-wise manageable account of experience; if it does, it provides a sound basis to enter into the discourse about making policies that diminish persistency of poverty within countries. 12

Indeed it might be of interest to trace scholarly thought about poverty. Aristotle was one of the first documented scholars to discuss economy theoretically, which as an anti-thesis includes poverty (bad economy equals poverty).

56

Oliver Schmidt

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References Acemoglu, D. / Johnson, S. / Robinson, J. (2006): Understanding Prosperity and Poverty: Goegraphy, Institutions, and the Reversal of Fortune, in: in: Banerjee, A. V./ Benabou, R./ Mookherjee, D. (2006): Understanding Poverty, New Delhi et. al., p. 19-36. Blasberg, A. / Blasberg, M. (2007): Sklaven in Altona, in: Die Zeit Nr. 11, 8th March 2007. Bourguignon, F. / Morrisson, C. (2002): Inequality Among World Citizens, 1820-1992, in: American Economic Review 92 (4) 2002:727-744. Bundesregierung (2005): Lebenslagen in Deutschland - Der 2. Armuts- und Reichtumsbericht der Bundesregierung, Report of the Federal Government of Germany, Berlin. Collier, P. (2007): The Bottom Billion – Why the Poorest Countries are failing and what can be done about it, Oxford. Deaton, A. (2006): Measuring Poverty, in: Banerjee, A. V./ Benabou, R./ Mookherjee, D. (2006): Understanding Poverty, New Delhi et. al., p. 3-15. De Soto, H. (2000): The Mystery of Capital: Why Capitalism Triumphs in the West and Fails Everywhere Else, New York et al. Diamond, J. (2005): Collapse: How Societies Choose to Fail or Succeed, New York. Easterly, W. (2006): The White Man's Burden, New York. Economist (2003): Germany's reforms - Dreaming of an economic revival, in: The Economist, 20th March 2003. Economist (2005): The Mountain Man and the Surgeon – Reflections on Relative Poverty in North America and Africa, in: The Economist, Special Report, 20th December 2005. Economist (2007): Cheap no more, in: The Economist, Dec. 8th – 14th 2007, p. 81-83. Eswaran, M. (2006): Fertility in Developing Countries, in: , in: Banerjee, A. V./ Benabou, R./ Mookherjee, D. (2006): Understanding Poverty, New Delhi et. al., p. 143-160. Frankel, J. A. (1997): Regional Trading Blocs in the World Economic System, Washington D. C. Grossekettler, H. (1991): Die Versorgung mit Kollektivgütern als ordnungspolitisches Problem, in: Ordo, Jahrbuch für die Ordnung von Wirtschaft und Gesellschaft, Band 42 (1991), p. 69-89. Kaempke, T./ Pestel R./ Radermacher F. J. (2003): A computational concept for normative equity. European Journal of Law and Economics, No. 15, Vol. 2, 129–163. Kawachi, I./ Kennedy, B. P./ Wilkinson, R. G. (Eds., 1999): The Society and Population Health Reader, Vol. I, New York. Kilibo, C./ Schmidt, O (2005): Mitigating Risks – Experiences from Uganda, in: Development and Cooperation 1/2006, p. 21-23. Landes, D. (1998): The Wealth and Poverty of Nations, New York. Luce, E. (2006): In Spite of the Gods – The Strange Rise of Modern India, London. Mokyr, J. (2006): The Market for Ideas and the Origins of Economic Growth in Eighteenth Century Europe, Conference Paper, under: www.knaw.nl/heinekenprizes/pdf/56.pdf [23rd March 2008]. Mookherjee, D. (2006): Poverty Persistence and Design of Antipoverty Policies, in: Banerjee, A. V./ Benabou, R./ Mookherjee, D. (2006): Understanding Poverty, New Delhi et. al., p. 231-242. Morduch, J. (2006): Microinsurance: The Next Revolution?, in: Banerjee, A. V./ Benabou, R./ Mookherjee, D. (2006): Understanding Poverty, New Delhi et. al., p. 337-356. Oosterhout, Henk van (2006): Where does the money go? – From Policy Assumption to Financial Behaviour at grassroots, Amsterdam. Rodrik, D. / Subramanian, A. / Trebbi, F. (2002): Institutions Rule: The Primacy of Institutions over Geography and Integration in Economic Development, NBER Working Paper No. 9305, Cambridge MA.

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Russell, B. (1946): History of Western Philosophy and its Connection with Political and Social Circumstances from the Earliest Times to the Present Day, New York. Russell, B. (1934): Freedom and Organisation, 1814-1914, London. Sainath, P. (1996): Everybody loves a good Drought – Stories from India's poorest Districts, New Delhi et al. Schmidt, O. (2006): Do Microfinance Development Strategies care about the consumer? – Assessing Microfinance trends and drivers upon the case of Uganda, in: Info-CD "Microfinance", ded Fachreferat P12, Bonn, September 2006. Schmidt, O. (2005): Globalisierung und Arbeitsstandards: Kontroversen, Grundlagen, Ansätze, Vol. 3, "Schriften zur internationalen Wirtschaftspolitik", ed. by U. Mummert / F. L. Sell, Hamburg u. a. Sachs, J. (2005): The End of Poverty – How we can make it happen in our Lifetime, London. Krueger, S. And Schlein, L. (2006): Urban poor worse off than rural poor but good policies can reduce slums, under: http://www.citymayors.com/society/urban_poor.html [4th Aug 2006]. Sen, A. (1981): Poverty and Famines, New York. Sen, A. (2000): Development as Freedom, Oxford. Sen, A. (2006): Identity and Violence – The Illusion of Destiny, New York. Shipler, D. K. (2004): The Working Poor – Invisible in America, New York. Stiglitz, J. (2006): Making Globalisation Work, New York. Surowiecki, J. (2008): What Microloans Miss, in: The New Yorker, 17 March, 2008. Suntum, U. v. (1999): Die unsichtbare Hand, Heidelberg. Titus, M. (2008): Microfinance in India - What do we know?, Presentation at ICRIER’s Financial Sector Seminar, 5th February 2008, New Delhi (unpublished). Tuchman, B. (1978): A Distant Mirror – The Calamitous Fourteenth Century, New York. Weber, M. (1980): Wirtschaft und Gesellschaft. Grundriß der Verstehenden Soziologie, 5th edition, ed. by J. Winckelmann, Tübingen. Worldbank (2008a): PovertyNet; under www.worldbank.org -> Topics -> Poverty [2.05.2008]. Worldbank (2008b): Global Economic Prospects 2008, Washington D. C. Yunus, M. (1998): Banker to the Poor, with Alan Jolis, London.

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In: Welfare Economics Editors: Paul E. Weston et al, pp. 59-95

ISBN: 978-1-60456-946-9 © 2009 Nova Science Publishers, Inc.

Chapter 2

A PROJECT ... AFRICA Alida Paunić Abstract

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In order to come to level I of civilization according to Kardashe scale all renewable sources should be employed to satisfy our energy needs. Necessity of doing so should not be considered only to avoid more and more visible environmental treats, but to make investment in timely manner consulting a broad range of scientists around the globe to find more feasible solutions. Building an environment friendly world should not leave the poorest out but help, by investing in sun rich areas, economic development of the lowest income groups and ensure energy supply stability to high income ones.

Introduction To find a similar planet like Earth is a hard job even for Hubble, two exactly the same persons are of the same rarity since identical fingerprints do not exist. Each is unique and special. There is a tale among religious people that God has created a nice picture of human children-a picture that should mean good, nice and happy life for everyone, but coming on Earth this divine image is more or less distorted. Not just that life of each person deviates from the original, but the Earth itself with all its creatures is going periodically through periods that are not heading in a good direction. If I may just remind you of the map drawn by the UN called a Millennium Goal it is clear that humanity as well as Earth are still burdened by many unresolved problems. Yet, a significant number of population is living on less than $1 a day (Table 1), with the majority of them being placed in Sub Saharan Africa and South Asia. The same area hosts the children that suffer from malnutrition having only 5 years of age and less, as well as those with no primary education completed.

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Table 1. Millennium Goal Share of population living on less than $1 a day

Malnutrition of children under 5 years of age

% of children NOT completing primary education

Public expenditure per primary student as % of GDP per capita

Data from a year:

2003

2003

2004

2004

Latin America & Caribbean Europe & Central Asia Middle East North Africa Sub Saharan Africa East Asia Pacific South Asia

9% 2% 2% 44% 12% 31%

7% 5% 13% 29% 15% 45%

4% 6% 12% 39% 2% 13%

12% 12% 14% 0% 10% 9%

Incidents of tuberculosis per 100000 people

% of population with access to an improved water source

Aid per capita $ USD

64 83 54 363 138 177

91 92 89 56 79 84

13 25 35 36 4 5

Source: www.worldbank.org www.un.org

Table 2. Millennium goal

Mortality rate under 5 years per 1000,00

% of children immunized against measles

2004

2004

Number of woman who die in a pregnancy or child birth per 100.000 live birth 2000

122 42 28 86 7

63 83 91 74 93

684 163 91 450 14

Data from a year: Low income Lower middle income Upper middle income Low/middle income High income Source www worldbank.org www un.org

Prevalence of HIV in adult population 1545

Emissions of CO2 metric ton per capita

2004

2004

1,7 0 2 1 0

1 3 6 2 13

A Project ... Africa

61

Low income countries (Table 2) are facing large mortality rate, as well as having greater percentage of children not immunized against measles. Incidents of tuberculosis are among population of Sub Saharan Africa and South Asia likely to occur, leaving again Sub Sahara people exposed the most to water deprivation. Latin America and South Asia are the regions with the highest percentage of debt service of exports of goods and services, while African countries again are among those receiving the most aid per capita. It is important to address one more topic mentioned in Millennium Goal, the one related to CO2 emission per capita. Here by far the largest part is observed among high income countries, with small or none of emissions produced by the low income ones. These facts show us that the poorest countries are not challenging only the economic problems of high poverty but they are also dealing with consequences of climate change produced in high income countries. This leaves them to sink even more in a common boat that is shaken by climate-induced degradation of freshwater resources, climate-induced increase in storms and flood disasters, climate-induced decline in food production and more than ever desired migration. But where ? This paper tries to cope with problems of Earth human picture deviated from original by correlating current knowledge of the technology and physics with the economy. The model presented states that although there is a hard evidence about selfish nature of human kind that hoards not just material but environmental treasure, when presented within broader picture of individual, regional, world and space determinants, it is even better understood, grasping a necessity of action in a short period of time to be safely moved to new dimension of individual, regional, world space number 2.

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2. Physics and Economics Our world is a place filled with interdependencies. Actions, growth, maturity success depends not just from our own physical, intellectual, moral ability but from various outside arrows that spreads from environment, political state of matters, heritage, economic development and unavoidable vis major. This interconnction is observed throught world whether is it a word about develop, transitional or country that still struggles with finding a way toward a life that guarantees a longer survival and basic human rights. Suprisingly dependent countries are not just the poor ones, even the most develop ones, in a large number of cases, relays on others like… on energy. Economists by occupation and those forced to be by praxis have realized a great potential in bounding economy to each segment of science and life. Although a large majority of population create some new economic directions or laws on the every day basis ones that are honored by the most prestigious prize, a Nobel, are ones that proved their theories to be innovative, applicable and very much true. Engle and Grenger (2003) incorporated econometrics in economics telling us more about time series and volatility; how humans make judgments and decisions under uncertainty is described by Kehneman, Smith (2002); understanding of conflict and cooperation through game theory analysis was researched by Aumann and Schelling (2005). Great Indian economist Amartya Sen (1998) gave us new insight into welfare economics just a two years after learning to know more about economic theory of incentives under asymmetric information made by Mirrlees, Vickray (1996) and Stiglitz, Spence, Akerlof (2001). Finding

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62

Alida Paunić

an equilibrium in the non cooperative game was life achievement by Nash, Selten and Harsanyi. Widened domain of microeconomic analysis to a broad range of human behavior and interaction was researched by Becker (1992) leaving subjects of optimal allocation of resources to Kantorovich, Koopmans (1975), efficient utilization of resources to Allais (1988) and theory of growth stabilization to Friedman (1976). By mentioning just a few honorable members of economic science I have tackled a constant desire in mankind to constantly push the limits of knowledges and achievments. However, in order to reach theory of everything more complex themes need to be taken into consideration and each day new data and knowledge turn out as new and important in order to reach one theory of all forces in our universe. It is hard even today to accomplish such a theory in the economic world. Two opposite directions like centrally planned economy and market economy seamed to develop two distinct ways each trying its best to make a world a better more justice place. But both struggle with problems, making some mixture of socially market oriented countries to solve issues in the most suitable ways nowadays.1 Desire to find a great unifying theory in physics waits for some new proves from Large particle collider in CERN, leaving economists to find similar great theory that would solve Millennium Goals in the nearest term possible. For both we have to wait just a little longer trying to learn more one from another. If we correlate some physical findings with economy some new ideas, results or positive movement could follow. At least what we could do is to practice in class, family a little game that would probably with down of each new day and each new person resulted in a different way. Lets play, find correlation and solution to a problems we are dealing with. (Table 3). Presented relations could be made in thousand different ways, each correct and vary wrong but bringing us all to closer understandings of life by examining our economical past and future at the same time being aware of possibilities, weaknesses and strengths that our theory carry . After having fun with finding certain real or imaginatory similarities we can conclude that each science is a search for answers. Still large box of questions and possible answers lies on the table like unexplained first few seconds after Big Bang and final destiny of space. On economical side of problems some undesired inflation, drastic GDP fall, unjust privatization, lack of strategy with new low priced products in a market economy and reasons for fall of great empire could arise. From physicist we have learn that beginning and end of our world is not solved matter where actual fate depends upon invisible mystical dark energy - small substance that fills universe. Living in a wider world where known elements like heavy ones, neutrinos, stars, free hydrogen and helium occupies only 5% of space, leaving the rest of it to dark matter 25% and more mysterious dark energy 70% is not a world of certainties. Further interesting thing what they have teached us is that our future depends upon this small invisible energy. How?

1

Sweden,Norway, Finnland, Icland,

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Table 3. Playing with physics and economics

1 1

Physics

Macro economy

Micro economy

Financial Economics

2

3

4

5

Kinematics xf = x i+(v i+vf) / 2 xf=xi+vt+1/2 at2 xf=xi+vt-1/2 at2 vf2=v i2+2a(xf-xi) v=dx/dt Dynamics

2 F=m*a N=m*g* cos q fk=w*N

Px+...+pxn=Σpx Px+...+px 1 d(s+t)=s'(dy-t'dy)+t'dy i+Δinv+g=s+t dy=c'(1-t')dy+di+dg

f(x)>f concave F(x)0

φu/ φp =-λ x =- φu/ ΦM x φu/ φp =-λ x =- φu/ ΦM x φD/ φp = φH/ φp - x * φD/ ΦM

WACC=Ke (E/E+D)+Kd(D/D+E)

Momentum

5

p=mv J = ∫ F*dt m1v1+m2v2= m1v1’+m2v2’ ½*m1v1+1/2*m2v2= ½*m1v1’+1/2*m2v2’

Rj= Rf+(Rm-Rf)*β

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Table 3. Continued Physics

Macro economy

Micro economy

Financial Economics

2

3

4

5

1

6

Uniform circular Motion and Gravitation a= v2/r=4 π 2r/t2 F= mv2/r F=G * m1m2/r2

dy=(1-c' )/(1-c'+i'k'/l') dg

P(q)=pq-c(q)

Thermodynamics

dy=(i'/l' )/(1-c' (1-t')+i'k'/l') dm

P'(q)=p+qdp/dq-c'(q)=0

Q=m*c*∆T ∆L=L* α*∆T ∆V=V *β *∆T PV=nRT (PV/T)i=(PV/T)f ∆U=∆Q+∆T e=1-q out/ q in

dy/dP=(-i'/l' *m' )/(1-c'* (1-t')+i'k'/l'

P''(q)=2 dp/dq+q d2p/dq2-c''(q)0 universe is hyperspherical K=0 universe is flat K1 A