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Why Has Poverty Fallen So Much?


Saturday greetings from The Weekly Better Bulletin! May you find today's Bulletin both informative and, most importantly, hopeful. The theme of The Weekly Better, from now until November when my book The Daily Better comes out, will be gratitude. In particular, I will remind you the reader of the fantastic world we live in. I'm grateful that global poverty rates have never been lower. Less than 10% of people live on less than $1.90 a day. For most of human history, poverty levels were greater than 80%. Why are rates so much lower today?

The answer is complicated. First it's good to ask Where has poverty fallen the most? The answer: China. According to the UN Development Program, real GDP rose elevenfold in China between 1990 and 2013. What's the main reason? The UN, not know for its promotion of capitalism, states that the "shift from a centrally planned economy to a market-based economy" was the main reason why China's GDP grew. With rising GDP came declining poverty. 

Another country that has seen large declines in poverty is Indian. The Indian economy grew slowly after the country's independence in 1947. It copied many Soviet economic policies, like five year plans, and it nationalized heavy industries and natural resources. The result? economic stagnant. Stagnation continued until the Soviet Union, India's #1 trading partner, dissolved in 1991. The Indian economy hit a crisis, so the government implemented economic reforms that led to a market-based economy.

What thread connects China and India? Less state direction of the economy and more economic freedom. The two most populous countries in the world, China and India, had centralized, state directed economies until the late 20th century. After they liberalized, their economies grew like gangbusters. 

The best part of this growth meant that there was more money in the economy. This led to decreases in poverty and higher tax revenues, which led to better health care, education and other public (and private) services. While the state has been very active in ensuring better public services in China, in India a growth in private schools and hospitals has also improved services for many people.

Is it all rosy? Absolutely not. Poverty and corruption are still major problems in both countries, especially India. Poverty has not fallen in India nearly as quickly as it has in China. And income inequality has grown starkly in both countries. 

Still, these are higher quality problems that the richer, better educated citizens of these countries are demanding solutions for. While China remains an authoritarian country, India's democracy is mature and vital. 

In the rest of the world, most countries have eschewed state directed economies for market-based economies. Even communist countries like Vietnam are part of the world market. More open economies in Latin America have increased GDP, and much of sub-Saharan Africa has growing economies (though the progress is uneven). 

Open markets, less government control of commerce, and liberalized world trade have enriched most of the world and been a major factor in the global decline of poverty. Capitalism has plenty of problems. The global financial crisis of 2007-2008 was caused by illegal (and certainly unethical) practices in subprime mortgage lending in the US. The European debt crisis also hobbled the world economy. There are certainly reforms that have occurred and must occur for market-based economics to be fair and ethical. But it is hard to deny that China's reforms in the 1980s and the fall of the Soviet Union in 1991 led to an age of commerce that helped lift more than a billion people out of poverty since 1990.

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