Poverty and Inequality

There is arguably nothing worse for long run growth prospects in an economy than low social mobility. Without the possibility of advancing upwards in society, poor people have little incentive to work hard and invest in human and physical capital. Conversely, without investment and hard work, there is little chance of improving. Thus, the poverty trap.

Maybe the only thing worse than low social mobility, is low social mobility AND high inequality. This situation reflects a country with a large gap between the rich and the poor, and little chance of ever crossing that gap – a situation which by any standards must be considered unfair. Outcomes are mostly determined from birth, by factors entirely outside the control of each individual, whereas subsequent effort and investments make little difference.

Read More »

“The bourgeoisie has subjected the country to the rule of the towns. It has created enormous cities, has greatly increased the urban population compared to the rural, and has thus rescued a considerable part of the population from the idiocy of rural life.” Karl Marx, The Communist Manifesto, 1848

All over the world, development and economic growth has gone hand in hand with increased urbanization. Not a single country in the world has managed to reach middle or high income levels without at least half of the population moving into cities, although quite a lot has managed to urbanize heavily without achieving economic growth – see Figure 1 below. It thus seems that urbanization is a necessary, but not sufficient, condition for development.

Read More »

There are many aid pessimists, like me, who would much rather be aid optimists. However, the empirical evidence on the effectiveness of foreign aid is depressing, especially in poor countries where aid constitutes a significant share of GDP, as in Bolivia and Nicaragua (1).

Any particular aid project is unlikely to actually hurt the poor – at worst it may be ineffective and a waste of time and money. However, a continuous series of thousands of aid projects have the capacity to change the behavior of both individuals and government, and often in unanticipated and undesirable ways.

Read More »