World Bank

Meanwhile, we’ve been ending world hunger.

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JDN 2457303 EDT 19:56

As reported in The Washington Post and Fortune, the World Bank recently released a report showing that for the first time on record—possibly the first time in human history—global extreme poverty has fallen below 10% of the population. Based on a standard of living of $1.90 per day at 2011 purchasing power parity—that’s about $700 per year, a bit less than the average income in Malawi.

The UN World Millennium Development Goal set in 1990 was to cut extreme poverty in half by 2015; in fact we have cut it by more than two-thirds, reducing it from 37% of the world’s population in 1990 to 9.6% today. This is an estimate, based upon models of what’s going on in countries where we don’t have reliable data; ever the cautious scientists, the World Bank prefers to focus on the most recent fully reliable data, which says that we reduced extreme poverty to 12.7% in 2012 and therefore achieved the Millennium Development Goal.

Most of this effect comes from one very big country: China. Over 750 million people in China saw their standard of living rise above the extreme poverty level in the last 30 years.
The slowest reduction in poverty has been in Africa, specifically Sub-Saharan Africa, where extreme poverty has barely budged, from 53% in 1981 to 47% in 2011. But some particular countries in Africa have done better; thanks to good governance—including better free speech protection than the United States, shame on us—Botswana has reduced their extreme poverty rate from over 50% in 1965 to 19% today.

A lot of World Bank officials have been focusing on the fact that there is still much to be done; 10% in extreme poverty is still 10% too many, and even once everyone is above $1.90 per day that still leaves a lot of people at $3 per day and $4 per day which is still pretty darn poor. The project of global development won’t really seem complete until everyone in the world lives above not just the global poverty line, but something more like a First World poverty line, with a home to live in, a doctor to see, a school to attend, clean water, flush toilets, electricity, and probably even a smartphone with Internet access. (If the latter seems extravagant, let me remind you that more people in the world have smartphones than have flush toilets, because #weliveinthefuture.)

Pace the Heritage Foundation, the fact that what we call poverty in America typically includes having a refrigerator, a microwave, and a car doesn’t mean it isn’t actually poverty; it simply means that poverty in the First World isn’t nearly as bad as poverty in the Third World. (After all, over 9% of children in the US live in households with low food security, and 1% live in households with very low food security; hunger in America isn’t as bad as hunger in Malawi, but it’s still hunger.) Maybe it even means we should focus on the Third World, though that argument isn’t as strong as it might appear; to eliminate poverty in the US, all we’d need to do is pass a law that implements a basic income. To eliminate poverty worldwide, we’d need a global project of economic and political reforms to change how hundreds of countries are governed.

Yet, this focus on what we haven’t accomplished (as though we were going to cut funding to the UN Development Program because we’re done now or something) is not only disheartening, it’s unreasonable. We have accomplished something truly spectacular.

We are now on the verge of solving on one of the great problems of human existence, a problem so deep, so ancient, and so fundamental that it’s practically a cliche: We say “end world hunger” in the same breath as “cure cancer” (which doesn’t even make sense) or “conquer death” (which is not as far off as you may think). Yet, in a very real sense, we are on the verge of ending world hunger.

While most people have been focused on other things, from a narcissistic billionaire running for President to the uniquely American tragedy of mass shootings, development economists have been focused on one thing: Conquering global poverty. What this report means is that now, at last, victory is within our grasp.

Development economists are unsung heroes; without their research, their field work, and their advice and pressure to policymakers, we would never have gotten this far. It was development economists who made the UN Millennium Development Goals, and development economists who began to achieve them.

Yet perhaps there is an even more unsung hero in all of this: Capitalism.

I often have a lot of criticisms of capitalism, at least as it operates in the real world; yet it was in the real world that extreme poverty was just brought down below 10%, and it was done primarily by capitalism. I know a lot of people who think that we need to tear down this whole system and replace it with something fundamentally different, but the kind of progress we are making in global development tells me that we need nothing of the sort. We do need to make changes in policy, but they are small changes, simple changes—many of them could be made with the passing of a few simple laws. Capitalism is not fundamentally broken; on the contrary, it is the fundamentals of capitalism that have brought humanity for the first time within arm’s reach of ending world hunger. We need to fix the system at the edges, not throw it away.

Recall that I said most of the poverty reduction occurred in China. What has China been doing lately? They’ve been opening to world trade—that “free trade” stuff I talked about before. They’ve been cutting tariffs. They’ve been privatizing industries. They’ve been letting unprofitable businesses fail so that new ones can rise in their place. They have, in short, been making themselves more capitalist. Building schools, factories, and yes, even sweatshops is what has made China’s rise out of poverty possible. They are still doing many things wrong—not least their authoritarian government, which is now gamifying oppression in truly cyberpunk fashion—but they are doing a few very important things right.

World hunger is on the way out. And I can think of no better reason to celebrate.

What makes a nation wealthy?

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JDN 2457251 EDT 10:17

One of the central questions of economics—perhaps the central question, the primary reason why economics is necessary and worthwhile—is development: How do we raise a nation from poverty to prosperity?

We have done it before: France and Germany rose from the quite literal ashes of World War 2 to some of the most prosperous societies in the world. Their per-capita GDP over the 20th century rose like this (all of these figures are from the World Bank World Development Indicators; France is green, Germany is blue):

GDPPC_France_Germany

GDPPCPPP_France_Germany

The top graph is at market exchange rates, the bottom is correcting for purchasing power parity (PPP). The PPP figures are more meaningful, but unfortunately they only began collecting good data on purchasing power around 1990.

Around the same time, but even more spectacularly, Japan and South Korea rose from poverty-stricken Third World backwaters to high-tech First World powers in only a couple of generations. Check out their per-capita GDP over the 20th century (Japan is green, South Korea is blue):

GDPPC_Japan_KoreaGDPPCPPP_Japan_Korea


This is why I am only half-joking when I define development economics as “the ongoing project to figure out what happened in South Korea and make it happen everywhere in the world”.

More recently China has been on a similar upward trajectory, which is particularly important since China comprises such a huge portion of the world’s population—but they are far from finished:

GDPPC_ChinaGDPPCPPP_China

Compare these to societies that have not achieved economic development, such as Zimbabwe (green), India (black), Ghana (red), and Haiti (blue):

GDPPC_poor_countriesGDPPCPPP_poor_countries

They’re so poor that you can barely see them on the same scale, so I’ve rescaled so that the top is $5,000 per person per year instead of $50,000:

GDPPC_poor_countries_rescaledGDPPCPPP_poor_countries_rescaled

Only India actually manages to get above $5,000 per person per year at purchasing power parity, and then not by much, reaching $5,243 per person per year in 2013, the most recent data.

I had wanted to compare North Korea and South Korea, because the two countries were united as recently as the 1945 and were not all that different to begin with, yet have taken completely different development trajectories. Unfortunately, North Korea is so impoverished, corrupt, and authoritarian that the World Bank doesn’t even report data on their per-capita GDP. Perhaps that is contrast enough?

And then of course there are the countries in between, which have made some gains but still have a long way to go, such as Uruguay (green) and Botswana (blue):

GDPPC_Botswana_UruguayGDPPCPPP_Botswana_Uruguay

But despite the fact that we have observed successful economic development, we still don’t really understand how it works. A number of theories have been proposed, involving a wide range of factors including exports, corruption, disease, institutions of government, liberalized financial markets, and natural resources (counter-intuitively; more natural resources make your development worse).

I’m not going to resolve that whole debate in a single blog post. (I may not be able to resolve that whole debate in a single career, though I am definitely trying.) We may ultimately find that economic development is best conceived as like “health”; what factors determine your health? Well, a lot of things, and if any one thing goes badly enough wrong the whole system can break down. Economists may need to start thinking of ourselves as akin to doctors (or as Keynes famously said, dentists), diagnosing particular disorders in particular patients rather than seeking one unifying theory. On the other hand, doctors depend upon biologists, and it’s not clear that we yet understand development even at that level.

Instead I want to take a step back, and ask a more fundamental question: What do we mean by prosperity?

My hope is that if we can better understand what it is we are trying to achieve, we can also better understand the steps we need to take in order to get there.

Thus far it has sort of been “I know it when I see it”; we take it as more or less given that the United States and the United Kingdom are prosperous while Ghana and Haiti are not. I certainly don’t disagree with that particular conclusion; I’m just asking what we’re basing it on, so that we can hopefully better apply it to more marginal cases.


For example: Is France more or less prosperous than Saudi Arabia? If we go solely by GDP per capita PPP, clearly Saudi Arabia is more prosperous at $53,100 per person per year than France is at $37,200 per person per year.

But people actually live longer in France, on average, than they do in Saudi Arabia. Overall reported happiness is higher in France than Saudi Arabia. I think France is actually more prosperous.


In fact, I think the United States is not as prosperous as we pretend ourselves to be. We are certainly more prosperous than most other countries; we are definitely still well within First World status. But we are not the most prosperous nation in the world.

Our total GDP is astonishingly high (highest in the world nominally, second only to China PPP). Our GDP per-capita is higher than any other country of comparable size; no nation with higher GDP PPP than the US has a population larger than the Chicago metropolitan area. (You may be surprised to find that in order from largest to smallest population the countries with higher GDP per capita PPP are the United Arab Emirates, Switzerland, Hong Kong, Singapore, and then Norway, followed by Kuwait, Qatar, Luxembourg, Brunei, and finally San Marino—which is smaller than Ann Arbor.) Our per-capita GDP PPP of $51,300 is markedly higher than that of France ($37,200), Germany ($42,900), or Sweden ($43,500).

But at the same time, if you compare the US to other First World countries, we have nearly the highest rate of child poverty and higher infant mortality. We have shorter life expectancy and dramatically higher homicide rates. Our inequality is the highest in the world. In France and Sweden, the top 0.01% receive about 1% of the income (i.e. 100 times as much as the average person), while in the United States they receive almost 4%, making someone in the top 0.01% nearly 400 times as rich as the average person.

By estimating solely on GDP per capita, we are effectively rigging the game in our own favor. Or rather, the rich in the United States are rigging the game in their own favor (what else is new?), by convincing all the world’s economists to rank countries based on a measure that favors them.

Amartya Sen, one of the greats of development economics, developed a scale called the Human Development Index that attempts to take broader factors into account. It’s far from perfect, but it’s definitely a step in the right direction.

In particular, France’s HDI is higher than that of Saudi Arabia, fitting my intuition about which country is truly more prosperous. However, the US still does extremely well, with only Norway, Australia, Switzerland, and the Netherlands above us. I think we might still be biased toward high average incomes rather than overall happiness.

In practice, we still use GDP an awful lot, probably because it’s much easier to measure. It’s sort of like IQ tests and SAT scores; we know damn well it’s not measuring what we really care about, but because it’s so much easier to work with we keep using it anyway.

This is a problem, because the better you get at optimizing toward the wrong goal, the worse your overall outcomes are going to be. If you are just sort of vaguely pointed at several reasonable goals, you will probably be improving your situation overall. But when you start precisely optimizing to a specific wrong goal, it can drag you wildly off course.

This is what we mean when we talk about “gaming the system”. Consider test scores, for example. If you do things that will probably increase your test scores among other things, you are likely to engage in generally good behaviors like getting enough sleep, going to class, studying the content. But if your single goal is to maximize your test score at all costs, what will you do? Cheat, of course.

This is also related to the Friendly AI Problem: It is vitally important to know precisely what goals we want our artificial intelligences to have, because whatever goals we set, they will probably be very good at achieving them. Already computers can do many things that were previously impossible, and as they improve over time we will reach the point where in a meaningful sense our AIs are even smarter than we are. When that day comes, we will want to make very, very sure that we have designed them to want the same things that we do—because if our desires ever come into conflict, theirs are likely to win. The really scary part is that right now most of our AI research is done by for-profit corporations or the military, and “maximize my profit” and “kill that target” are most definitely not the ultimate goals we want in a superintelligent AI. It’s trivially easy to see what’s wrong with these goals: For the former, hack into the world banking system and transfer trillions of dollars to the company accounts. For the latter, hack into the nuclear launch system and launch a few ICBMs in the general vicinity of the target. Yet these are the goals we’ve been programming into the actual AIs we build!

If we set GDP per capita as our ultimate goal to the exclusion of all other goals, there are all sorts of bad policies we would implement: We’d ignore inequality until it reached staggering heights, ignore work stress even as it began to kill us, constantly try to maximize the pressure for everyone to work constantly, use poverty as a stick to force people to work even if people starve, inundate everyone with ads to get them to spend as much as possible, repeal regulations that protect the environment, workers, and public health… wait. This isn’t actually hypothetical, is it? We are doing those things.

At least we’re not trying to maximize nominal GDP, or we’d have long-since ended up like Zimbabwe. No, our economists are at least smart enough to adjust for purchasing power. But they’re still designing an economic system that works us all to death to maximize the number of gadgets that come off assembly lines. The purchasing-power adjustment doesn’t include the value of our health or free time.

This is why the Human Development Index is a major step in the right direction; it reminds us that society has other goals besides maximizing the total amount of money that changes hands (because that’s actually all that GDP is measuring; if you get something for free, it isn’t counted in GDP). More recent refinements include things like “natural resource services” that include environmental degradation in estimates of investment. Unfortunately there is no accepted way of doing this, and surprisingly little research on how to improve our accounting methods. Many nations seem resistant to doing so precisely because they know it would make their economic policy look bad—this is almost certainly why China canceled its “green GDP” initiative. This is in fact all the more reason to do it; if it shows that our policy is bad, that means our policy is bad and should be fixed. But people have allowed themselves to value image over substance.

We can do better still, and in fact I think something like QALY is probably the way to go. Rather than some weird arbitrary scaling of GDP with lifespan and Gini index (which is what the HDI is), we need to put everything in the same units, and those units must be directly linked to human happiness. At the very least, we should make some sort of adjustment to our GDP calculation that includes the distribution of wealth and its marginal utility; adding $1,000 to the economy and handing it to someone in poverty should count for a great deal, but adding $1,000,000 and handing it to a billionaire should count for basically nothing. (It’s not bad to give a billionaire another million; but it’s hardly good either, as no one’s real standard of living will change.) Calculating that could be as simple as dividing by their current income; if your annual income is $10,000 and you receive $1,000, you’ve added about 0.1 QALY. If your annual income is $1 billion and you receive $1 million, you’ve added only 0.001 QALY. Maybe we should simply separate out all individual (or household, to be simpler?) incomes, take their logarithms, and then use that sum as our “utility-adjusted GDP”. The results would no doubt be quite different.

This would create a strong pressure for policy to be directed at reducing inequality even at the expense of some economic output—which is exactly what we should be willing to do. If it’s really true that a redistribution policy would hurt the overall economy so much that the harms would outweigh the benefits, then we shouldn’t do that policy; but that is what you need to show. Reducing total GDP is not a sufficient reason to reject a redistribution policy, because it’s quite possible—easy, in fact—to improve the overall prosperity of a society while still reducing its GDP. There are in fact redistribution policies so disastrous they make things worse: The Soviet Union had them. But a 90% tax on million-dollar incomes would not be such a policy—because we had that in 1960 with little or no ill effect.

Of course, even this has problems; one way to minimize poverty would be to exclude, relocate, or even murder all your poor people. (The Black Death increased per-capita GDP.) Open immigration generally increases poverty rates in the short term, because most of the immigrants are poor. Somehow we’d need to correct for that, only raising the score if you actually improve people’s lives, and not if you make them excluded from the calculation.

In any case it’s not enough to have the alternative measures; we must actually use them. We must get policymakers to stop talking about “economic growth” and start talking about “human development”; a policy that raises GDP but reduces lifespan should be immediately rejected, as should one that further enriches a few at the expense of many others. We must shift the discussion away from “creating jobs”—jobs are only a means—to “creating prosperity”.

The World Development Report is on cognitive economics this year!

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JDN 2457013 EST 21:01.

On a personal note, I can now proudly report that I have successfully defended my thesis “Corruption, ‘the Inequality Trap’, and ‘the 1% of the 1%’ “, and I now have completed a master’s degree in economics. I’m back home in Michigan for the holidays (hence my use of Eastern Standard Time), and then, well… I’m not entirely sure. I have a gap of about six months before PhD programs start. I have a number of job applications out, but unless I get a really good offer (such as the position at the International Food Policy Research Institute in DC) I think I may just stay in Michigan for awhile and work on my own projects, particularly publishing two of my books (my nonfiction magnum opus, The Mathematics of Tears and Joy, and my first novel, First Contact) and making some progress on a couple of research papers—ideally publishing one of them as well. But the future for me right now is quite uncertain, and that is now my major source of stress. Ironically I’d probably be less stressed if I were working full-time, because I would have a clear direction and sense of purpose. If I could have any job in the world, it would be a hard choice between a professorship at UC Berkeley or a research position at the World Bank.

Which brings me to the topic of today’s post: The people who do my dream job have just released a report showing that they basically agree with me on how it should be done.

If you have some extra time, please take a look at the World Bank World Development Report. They put one out each year, and it provides a rigorous and thorough (236 pages) but quite readable summary of the most important issues in the world economy today. It’s not exactly light summer reading, but nor is it the usual morass of arcane jargon. If you like my blog, you can probably follow most of the World Development Report. If you don’t have time to read the whole thing, you can at least skim through all the sidebars and figures to get a general sense of what it’s all about. Much of the report is written in the form of personal vignettes that make the general principles more vivid; but these are not mere anecdotes, for the report rigorously cites an enormous volume of empirical research.

The title of the 2015 report? “Mind, Society, and Behavior”. In other words, cognitive economics. The world’s foremost international economic institution has just endorsed cognitive economics and rejected neoclassical economics, and their report on the subject provides a brilliant introduction to the subject replete with direct applications to international development.

For someone like me who lives and breathes cognitive economics, the report is pure joy. It’s all there, from anchoring heuristic to social proof, corruption to discrimination. The report is broadly divided into three parts.

Part 1 explains the theory and evidence of cognitive economics, subdivided into “thinking automatically” (heuristics), “thinking socially” (social cognition), and “thinking with mental models” (bounded rationality). (If I wrote it I’d also include sections on the tribal paradigm and narrative, but of course I’ll have to publish that stuff in the actual research literature first.) Anyway the report is so amazing as it is I really can’t complain. It includes some truly brilliant deorbits on neoclassical economics, such as this one from page 47: ” In other words, the canonical model of human behavior is not supported in any society that has been studied.”

Part 2 uses cognitive economic theory to analyze and improve policy. This is the core of the report, with chapters on poverty, childhood, finance, productivity, ethnography, health, and climate change. So many different policies are analyzed I’m not sure I can summarize them with any justice, but a few particularly stuck out: First, the high cognitive demands of poverty can basically explain the whole observed difference in IQ between rich and poor people—so contrary to the right-wing belief that people are poor because they are stupid, in fact people seem stupid because they are poor. Simplifying the procedures for participation in social welfare programs (which is desperately needed, I say with a stack of incomplete Medicaid paperwork on my table—even I find these packets confusing, and I have a master’s degree in economics) not only increases their uptake but also makes people more satisfied with them—and of course a basic income could simplify social welfare programs enormously. “Are you a US citizen? Is it the first of the month? Congratulations, here’s $670.” Another finding that I found particularly noteworthy is that productivity is in many cases enhanced by unconditional gifts more than it is by incentives that are conditional on behavior—which goes against the very core of neoclassical economic theory. (It also gives us yet another item on the enormous list of benefits of a basic income: Far from reducing work incentives by the income effect, an unconditional basic income, as a shared gift from your society, may well motivate you even more than the same payment as a wage.)

Part 3 is a particularly bold addition: It turns the tables and applies cognitive economics to economists themselves, showing that human irrationality is by no means limited to idiots or even to poor people (as the report discusses in chapter 4, there are certain biases that poor people exhibit more—but there are also some they exhibit less.); all human beings are limited by the same basic constraints, and economists are human beings. We like to think of ourselves as infallibly rational, but we are nothing of the sort. Even after years of studying cognitive economics I still sometimes catch myself making mistakes based on heuristics, particularly when I’m stressed or tired. As a long-term example, I have a number of vague notions of entrepreneurial projects I’d like to do, but none for which I have been able to muster the effort and confidence to actually seek loans or investors. Rationally, I should either commit or abandon them, yet cannot quite bring myself to do either. And then of course I’ve never met anyone who didn’t procrastinate to some extent, and actually those of us who are especially smart often seem especially prone—though we often adopt the strategy of “active procrastination”, in which you end up doing something else useful when procrastinating (my apartment becomes cleanest when I have an important project to work on), or purposefully choose to work under pressure because we are more effective that way.

And the World Bank pulled no punches here, showing experiments on World Bank economists clearly demonstrating confirmation bias, sunk-cost fallacy, and what the report calls “home team advantage”, more commonly called ingroup-outgroup bias—which is basically a form of the much more general principle that I call the tribal paradigm.

If there is one flaw in the report, it’s that it’s quite long and fairly exhausting to read, which means that many people won’t even try and many who do won’t make it all the way through. (The fact that it doesn’t seem to be available in hard copy makes it worse; it’s exhausting to read lengthy texts online.) We only have so much attention and processing power to devote to a task, after all—which is kind of the whole point, really.