After a detour to the Millennium Villages, we’re now in the final stages of our long hop, skip and jump through The End of Poverty, the ambitious blueprint for eliminating extreme poverty by Professor Jeffrey Sachs. Last time, we looked at the on-the-ground investments in things like fertiliser which Sachs argues can transform lives in rural villages relatively cheaply - and which he’s testing out in the Millennium Villages. Now, let’s see how he believes this approach works when applied at a global scale.

Sachs reiterates a point he’s made before: that the very poor are stuck in a “poverty trap” that leaves them unable to benefit from trade. If you can grow barely enough food to feed your family, you can’t invest in the tools, improved fertilisers and other materials needed to improve yields so you can sell some of your produce. Indeed, if your plough breaks, you can’t even replace it, so your productivity actually declines.

But it’s not just physical capital such as tools that the poor lack. Sachs outlines six major types of capital the poor are short in:

  1. Human capital: health, nutrition and skills
  2. Business capital: machinery, tools, transport
  3. Infrastructure: roads, power, telecoms
  4. Natural capital: fertile soil, running water
  5. Public institutional capital: rule of law, property rights, policing
  6. Knowledge capital: scientific know-how for future development.

This last includes top-level investment, like India’s Institutes of Technology, which have helped it become a hugely successful IT services exporter; it also means training individuals at village level as community health workers, agricultural experts and so on.There are no shortage of ways such capital can be reduced. Simple wear and tear, such as overfarming, can lead to a decline in natural capital, business capital, and infrastructure. Moreover, population growth means that the share of natural capital available to each individual is always decreasing.

For capital to increase, on the other hand, requires investment. Either individuals must be able to save to invest in their personal capital; or, by paying taxes, must help the government invest. If this investment is possible, the capital growth enables economic growth, raising incomes.

Sachs gives a simple example of how the level of capital a household has determines whether or not they can get on the ladder of development. Watch out: there are numbers.

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Say that an economy needs $3 of capital for every $1 of goods it produces. And say that natural depreciation reduces the society’s capital by 2% a year. The economy has 1 million people, each with capital of $900. $900 produces $300 of production, or income. That’s less than $1/day, which classifies them as extremely poor. $300 a year is just enough for subsistence and not enough to save. And the population is growing at 2% a year, so in ten years there’ll be 1.2 million people. Ten years on, the capital stock has declined to $750 million; between 1.2 million people we’re down from $900 each to $628 each - generating income of only $209 per person. Simply through the passing of time, the very poor get poorer still.

If, on the other hand, you start with everyone having $1800 of capital, and therefore $600 annual income per person. Households manage to save $90 per person each year. That adds $90 million to the total capital stock, which outweighs the depreciation of $36 million (2% of 900 million). The next year’s capital stock totals $1854 million, which means income (divide by three) of $618 million. Even divided between the expanded population of 1.2 million, that’s still an improvement - $606 each.

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Start with a high enough capital level, and you allow the cycle of economic growth to take place. But once you did below that critical level, that’s a poverty trap - and the only way is down. (p247-249)

In fact, investment in capital usually benefits more than the example illustrates, because of returns on investment. For example, if you have a vital road like that which leads to the Kenyan port Mombasa, repairing damage to that road could hugely reduce the costs of production in several landlocked countries, benefits far greater than the actual investment put in. On the other hand, some investments have to reach a certain point before they have any effect at all - there’s no point paving half a road. This is called a threshold effect.

Still with me? Sachs’ point with all this is that investment in the lives of the poor can repay itself by plugging them into economic growth - and, in so doing, weaning them back off external investment and into self-sufficiency. In practice, poor countries lack the capital to make such investments, and donors must step in and take countries to this level through aid. “Targeted investments backed by donor aid,” says Sachs, “lie at the heart of breaking the poverty trap.” (p250)

Private versus public

Of course, capital isn’t really as simple as pouring in a pile of money. In a previous chapter Sachs compared development to medicine and proposed a complex system of diagnosis to decide which exact combination of investments will lift each country out of the poverty trap. Now Sachs points out that only some of the investments required are best performed by the government: infrastructure, human capital, natural capital, public institutions and some aspects of knowledge capital, especially scientific research aimed at improving the previous categories of capital. These aspects can be led by the public sector and funded largely by aid at first.

They’re best done by government - and this is one of Prof. Sachs’ more controversial observations - for several reasons:

  • First, if done by the private sector they would probably become monopolies, raising prices.
  • Second, some are “nonrival”, which means that one person’s use doesn’t reduce another’s ability to use. A road, for example, is a nonrival good - there isn’t a limited number of cars that can use a road in a day. A scientific discovery is another example. Because it’s not easy to make money off these, investment has to come from the public sector (even in America, Sachs notes, there’s significant public finance of science).
  • Third, they have “spillovers” from direct users to those around them. If you use an anti-malaria bed net, it also reduces my chance of infection by slowing the spread of the disease. Private enterprise tends to under-provide such goods, for example by charging more for bed-nets than people can afford.
  • Fourth, these types of capital are not only good for economic growth but are classified as human rights in the Universal Declaration of Human Rights, which includes the clause “Everyone has a right to a standard of living adequate for the health and well-being of himself and his family”. They’re good results in and of themselves, so-called ‘merit goods.’ For certainty these should be provided by the public sector.

Other areas of capital - business capital - should not be provided by governments. This is where Sachs outlines that, contrary to the occasional accusation, he isn’t a communist. Government-run businesses, Sachs argues, tend to be inefficient and run for political reasons which get in the way of effective operation. For example, factories get built in a minister’s constituency, not where they can be best run. Having said that, the government might temporarily support private business to get things moving, but withdraw when businesses become self-sufficient. An example of this is providing farmers with free or subsidised fertiliser for a few years.

“Differential diagnosis”

Working out the precise checklist of interventions needed in each place is difficult. Urban areas have different needs to rural areas; climate, mineral and agricultural wealth, all make a difference. What’s clear nevertheless, Sachs argues, is that investments must come together. There’s no single ‘magic bullet’ which alone will make the difference, although economists like to think there is - for example, right now it’s public institutional capital, with constant talk about ‘governance’. Reducing child mortality, for example, obviously requires improved human capital and infrastructure through health spending. But it also needs natural capital, for protection against drought; public institutional capital, for the management and effective use of investment; and knowledge capital, for scientific research into future improvements in health and nutrition. Each country, and at a more local level each area, needs a targeted package of investments matched to its specific needs.

It can work, Sachs says

Sachs offers ten examples of scaling-up programs that have proved successful. I’ll quickly describe two:

  • The ‘Green Revolution’ in Asia is Sachs’ primary example of how improved agricultural results can transform an entire economy, kick-starting economic growth. Investment by the Rockefeller Foundation, a once-mighty American money-pot, led to new high-yield types of staple crops in Mexico and then across Asia. For the first time, there was enough food to go round, thanks to rich-country scientific support.
  • The spread of contraception in the poor world has been “an example of scaling up par excellence“. The UN Population Fund was established in 1969 to co-ordinate the spread of planned parenthood techniques, and helped raise the use of contraceptives by couples in developing countries from 10% in 1970 to 60% in 2000. This has helped bring about a reduction in the average children born to every woman from 5 in 1950 to 2.8 now. And as we’ve seen before, that has knock-on effects for child mortality, as families have no more children than they can feed.

Technologies that have been proven to work at local level can, and should, be expanded to national level and beyond, argues Sachs. But in Africa, proven technologies like anti-malaria bed nets remain available to tiny proportions of the population. The heart of Sachs’ plan is a process for scaling-up those technologies across poor countries. Next time, we’ll see how Sachs says this will work.

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