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Confronting Capitalism
Real Solutions for a Troubled Economic System
By Philip Kotler AMACOM
Copyright © 2015 Philip Kotler
All rights reserved.
ISBN: 978-0-8144-3646-2
CHAPTER 1
THE PERSISTENCE OF POVERTY
No society can surely be flourishing and happy, of which the far greater part of the members are poor and miserable. —ADAM SMITH, The Wealth of Nations
Poverty is one of the most intractable and shameful problems mankind has had to deal with. Today, about 5 billion of the 7 billion people inhabiting the earth are poor or extremely poor. They go hungry. They have no energy or time for education. They are susceptible to disease because of little or no access to health care. They often have more children than they can support, which perpetuates a poverty class, a culture of poverty. Their hopeless condition leads some of the poor into lives of crime, hard drugs, and armed conflict. This means that the cost of poverty far exceeds the cost that the poor themselves bear. Poverty pours its poison on the rest of mankind.
Until the nineteenth century, the poor received little attention. Poverty was seen to be inevitable. Governments and do-gooders could do little about it. The Industrial Revolution exacerbated the problem in attracting poor rural peasants to the cities in search of work, leading to the establishment of shantytowns and poorhouses. The four worst slums in the world today are Dharavi in Mumbai, Orangi in Pakistan, Kibera in Nairobi, and the Favelas in Rio de Janeiro.
The plight of the poor became more visible in the nineteenth century with the publication in 1838 of Oliver Twist by Charles Dickens. Oliver Twist vividly dramatized the conditions and exploitation of the poor. Around the turn of the century, careful and caring researchers, such as Beatrice and Sidney Webb in the United Kingdom, started to count the number of poor and write about their plight.
The concept of creating antipoverty programs began in the nineteenth century and continues through today, when one-sixth of the world's population earns less than $1 a day. (Another 2 billion of the world's 7 billion people earn less than $2 a day.) U.S. president Lyndon Johnson declared an "unconditional war" on poverty in the mid-1960s. He helped pass enlightened legislation to reduce the level of U.S. poverty, including Medicaid, unemployment insurance, Head Start, and many other programs. In 1975, the "earned income tax credit" was enacted, which refunds to the working poor some of their income and payroll taxes. The EITC has averaged about $3,000 for families with one child and up to $6,000 for those with three or more children.
Finally, in the year 2000, the United Nations outlined its multilateral plan for reducing world poverty. The United Nations formulated the Millennium Development Goals (MDG), specifically eight goals with eighteen accompanying targets, designed to significantly reduce poverty levels by 2015. Target 1 was to cut in half, between 1990 and 2015, the proportion of people whose income is less than one dollar a day. Other goals include achieving universal primary education; promoting gender equality; reducing child mortality; improving maternal health; combating HIV/AIDS, malaria, and other diseases; ensuring environmental sustainability; and forming a global partnership in development. The goals are ambitious and all are not likely to be achieved, given the Great Recession starting in 2008, rising food and energy costs, and continued armed conflict in the world. World leaders are now asking the United Nations headquarters to take bolder action against extreme poverty, hunger, and disease and to adopt in 2015 the next set of antipoverty goals.
THE CAUSES OF POVERTY
Experts have put forth several different theories on the causes of poverty and advocated different measures to cure the problem. We can distinguish between experts who see poverty as having one major basic cause and those who see many causal factors at work.
The simplest theory is that the poor have brought the condition on themselves. Many who are poor did not care to learn anything in school, dropped out early, took on work requiring no skill, spent some of their income on drink, drugs, and gambling, got married too early, and had more children than they could support. Their children carried on the same indifference to education and skill building. Often the marriage broke up. Some who lost their job preferred to live on transfer payments like Medicaid, housing subsidies, food stamps, or disability payments rather than take on low-paid work. The solution is either to find ways to change their attitudes and behavior or leave them in their penurious state. Yet there is ample evidence that most of the poor would be ready and willing to escape their impoverished conditions if they could find employment and have a decent place to live.
Another theory is that poverty is the result of the poor having too many children. Each new child makes a poor family poorer. The argument goes further to say that the earth has a limited population "carrying capacity" for resources and food to permit a decent standard of living for 7 billion people, let alone the 9 billion people projected for 2050.1 Soil erosion over the past forty years has rendered 30 percent of the world's arable land unproductive. Agriculture today uses 70 percent of the world's freshwater. The heat and drought caused by climate warming reduce crop yields by 2 percent every ten years. So the problem is how to grow more food on less farmland with less water.
Under this theory, poverty continues to be a problem because of overpopulation. This is a version of Thomas Malthus's eighteenth-century proposition that the rate of population growth sooner or later will exceed the rate of growth of food supply, resulting in starvation, war, and the continuation of poverty. The modern version of this view was published in 1972 in The Limits to Growth by Donella H. and Dennis L. Meadows (with Jørgen Randers and William W. Behrens III). Here the solution follows that much poverty would abate if poor families would limit the number of their offspring voluntarily or by edict. China represents the latter in generally restricting families to bearing only one child. While the "one-child" policy now has several exceptions, it is estimated that between 1979 and 2009, approximately 200 million births were averted in China. Certainly this has been one of the major contributors to China's impressive reduction in the number of families living in poverty.
A third theory is that poverty persists because the poor don't own any fungible property or capital on which they could borrow money. They lack tradable assets. This theory has been propounded by the highly respected, though controversial, Peruvian economist Hernando de Soto in his book The Mystery of Capital: Why Capitalism Triumphs in the West and Fails Everywhere Else (Basic Books, 2010). De Soto argues that the actual source of wealth is real property, along with the existence of well- defined and socially accepted property rights. Property is an asset that can be used to get a loan or mortgage or obtain insurance or own stock and other things that make capitalism so effective in producing economic growth and prosperity. But, de Soto says, capitalism doesn't work in poor communities and countries because the financial institutions don't recognize the assets of the poor.
The poor have plenty of assets (land, homes, businesses), but these lie typically in the extralegal, informal realm. The legal system has not adapted to this reality. The costs of making these assets legal (obtaining proper title to a house, registering a business, etc.) are so prohibitive in terms of time and money that the assets end up being "dead capital." The poor cannot use their assets for credit to acquire the normal capitalist tools to achieve upward mobility. Because these assets are not recognized, they create an extralegal style of living within their informal social circles. For Hernando de Soto, the singular solution is to push the legal system to allow the monetization of these assets so the dead capital becomes alive.
Still another theory blames poverty on the greed of the ruling elite. The theory starts by drawing a distinction between economic growth and economic development. You can have economic growth without economic development. Economic growth is a necessary but not sufficient condition of economic development. Economic growth simply means that the pie (measured by GDP) has grown bigger, but it says nothing about how the pie is divided.
Economic development differs in being concerned with whether the average person's standard of living has increased and whether the person has more freedom of choice. Economic development can be measured by the Human Development Index. The HDI takes into account literacy rates, gender parity, and life expectancy, which affect productivity and could lead to economic growth. Economic development implies an increase in real income for most families. Economic development seeks to alleviate people from low standards of living and works toward providing citizens with jobs and suitable shelter. It seeks to improve lives without compromising the needs of future generations. On the other hand, economic growth does not address the question of the depletion of natural resources and pollution and global warming.
The difference between economic growth and economic development is well illustrated by the African country of Angola, where the GDP grew by 20 percent and yet poverty increased substantially. Much of the higher GDP flowed into the pockets of the ruling elites and their relatives and cronies. The daughter of the president of Angola herself was a billionaire and yet did nothing to create value for Angola. By contrast, Bill Gates built a business called Microsoft that made him a billionaire many times over, but at least the business contributed to the development of the U.S. economy and jobs.
Egypt's past ruler, Hosni Mubarak, had a fortune estimated at $42 billion. Many ministers in African countries are billionaires. Where did this money come from? A great deal came from foreign aid designed to help with economic development, most of which ended up in the pockets of the ruling elite.
Most African countries claim that Africa's deep and persistent poverty is due to the years of Western colonialism and imperialism. This is more an excuse that African dictators propagate to stay in power. The real cause of African poverty is bad African governance following independence, not colonialism. African countries made two mistakes after achieving independence. First, most African countries established a one-party state system with a president for life. This alone caused much of the wealth to flow to the president's extended family and cronies and led most other groups to be excluded from both governing and sharing in the benefits.
Second, most African countries established a socialist rather than a capitalist economic system with many state-owned enterprises (SOEs) to run the utilities, produce the steel and oil and other basic products, and carry on the commerce and trade of the nation. By contrast, South Korea emerged after the Second World War as a poor country comparable to African economies, but went capitalistic and today stands as a wealthy country with high citizen incomes and participation.
Why do civil wars plague the African continent? Because many of the countries are headed by a dictator whose family takes most of the "goodies." Some groups that are excluded from governance decide to break away and establish a separate state. As long as democracy and a free press are absent, there will be turmoil and violence. The only answer is to open up the political system. In addition, African countries must go back to the idea of the free-enterprise system that previously existed—when people (especially women) would bring produce to the market and freely buy and sell—not state-based economic organizations.
Apart from these grand singular-cause theories, the majority of experts recognize poverty as resulting from many interrelated causes, all of which must be addressed in an integrated fashion. Consider Paul Collier's views in his book The Bottom Billion. According to Collier, the billion people at the bottom live in "trapped countries." He identifies four elements that cause countries to become trapped:
1. Civil War. A great number of the bottom billion have been or are currently experiencing civil war. Wars result from these countries having large numbers of young men who are unemployed and uneducated as well as the existence of ethnic imbalances.
2. "Natural Resource Curse." Almost a third of these countries rely on exporting some raw materials. They typically lack the skills to add value to these natural resources. These governments tend to be corrupt and don't hold democratic elections.
3. Landlocked Countries. Almost a third of these countries are landlocked and economically disadvantaged, and they are surrounded by "bad neighbors."
4. Bad Governance. About three-fourths of these countries are governed by autocratic or corrupt leaders.
SOLUTIONS TO POVERTY
Each contributing condition requires a specific solution. Collier favors legitimate military interventions in areas being torn apart by civil war. Countries with large amounts of natural resources should develop skills that raise the value of their exports and should not simply export raw materials at world market prices. As for landlocked countries, they have to work with neighboring port-based countries to build roads that will give them access to ports. Bad governance is the hardest problem to solve. During his years in power, Robert Mugabe ran Zimbabwe into the ground while the rest of the world stood by helplessly.
Collier's chief recommendation to fight poverty is to "narrow the target and broaden the instruments." Narrowing the target means focusing only on the one billion of the world's people (70 percent of whom are in Africa) who are in countries that are failing. Broadening the instruments means shifting focus from simply providing aid to offering an array of policy instruments: better delivery of aid, occasional military intervention, international charters, and smarter trade policy.
What about foreign aid as a partial solution to the problems of the poor? There are two experts who hold sharply different views on the effectiveness of foreign aid. Jeffrey Sachs, author of The End of Poverty, wants the West to be more generous and give substantially more foreign aid to the poor countries. On the other hand, William Easterly, in The White Man's Burden, advances strong arguments against foreign aid. He describes Sachs as one of those big "top-down planners" who is never embarrassed about the many failures of foreign aid. Some estimate that as little as 15 percent of foreign aid reaches the deserving poor as a result of high administrative expenses and corruption. The "top-down planning" of foreign aid relief agencies fails to provide information on variations in local needs for medicines and foods. Foreign aid also creates a dependency that keeps countries from reaching for their own solutions.
Foreign aid hurts a country's private businesses that produce or sell the same foreign aid items. Easterly sees the work of large foreign aid bureaucracies and their vast expenditures and interventions to be largely a failure. At the same time, Easterly acknowledges some good deeds of these large foreign aid agencies, especially when they concentrate on particular needs—like drilling and maintaining local wells, building and maintaining local roads or sewage systems, or distributing medicine or food in particular places where they are needed.
The major problem of top-down planning is that huge agencies at the international and national level have to decide on the allocation of money to the different poverty-alleviation tools. They make their decision by setting priorities that reflect the overall conditions in the country. But from village to village, and city to city, the priorities may vary. This means that some communities receive more to spend on causes that are not important and other communities receive less than they need to spend.
This makes it desirable to add a "bottom-up planning approach" that engages all the communities to develop their own proposals and programs of need, which are then passed upward. The programs must meet certain criteria, such as taking a long view of what would develop the community, and explain the logic of the program. The need is to "Take the mountain into the valley." In The Fortune at the Bottom of the Pyramid, the late C. K. Prahalad eloquently describes how local innovation and financial assistance to the poor can incent the indigent to help themselves escape from poverty.
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Excerpted from Confronting Capitalism by Philip Kotler. Copyright © 2015 Philip Kotler. Excerpted by permission of AMACOM.
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