Toward a better understanding of poverty (wonkish)

Allow me to get my wonk on. It's becoming an increasingly mainstream idea that our traditional poverty measures just don't cut it. For years the UN Human Development Report has been playing with alternative measures. Well, this year we get the latest: the Multidimensional Poverty Index (MPI). In their own words, the new index "measures the combination of deprivations that each household experiences. The MPI uses microeconomic data to reflect the percentage of households that experience overlapping deprivations in three dimensions—education, health and living conditions." This month we get a lil taste of what's to come. The Oxford Poverty & Human Development Initiative (OPHI), with the support of the United Nations Development Programme, have released some preliminary results (104 developing countries) in advance of the upcoming 2010 Human Development Report to be released in the fall. 

First off, a little bit more about the MPI. The idea is that by looking beyond mere income poverty, one can ascertain a better understanding of the specific things (health, education, sanitation, electricity), that contribute to the overall picture of poverty. Governments, NGOs, or even random bloggers can then look at the data to figure out what the greatest needs are, and where it makes sense to intervene. The MPI also calculates the intensity of poverty by looking at how many different measures a certain population is lacking. As OPHI notes, "A person who is deprived in 70% of the indicators is clearly worse off than someone who is deprived in 40% of the indicators."

Sounds good in theory, but what about in practice? Well, some countries have already adopted a similar index, including Mexico. The index can be tailored to individual countries specific circumstances, different countries have different needs, different areas in need of improvement. In Mexico for instance the indicators used are: Current income per capita, Education, Access to healthcare, Access to social security, Housing quality and space, Basic services in homes, and Access to food. In December 2009 Mexico became the first country to implement a form of the MPI, with some astonishing results. As OPHI writes:

The results show that there is a striking contrast between deprivation in income-only and the multidimensional measure: only 1.2 per cent of indigenous people are vulnerable strictly in terms of income. Even across the entire population, only 4.4 per cent of Mexicans are income vulnerable only, whereas 44.2 per cent live in multidimensional poverty.

The measure distinguishes between a household which is poor in one dimension and one that is poor in several dimensions simultaneously. It is also decomposable by population group (indigenous/non-indigenous, over 65, under 17, etc) and by geographic regions. 



For example, comparison of Mexico City and Oaxaca shows that households in Oaxaca are more deprived in terms of basic services at home, but residents of the Mexico City are lacking in healthcare access. Nationally, the rate of extreme multidimensional poverty (defined as at least three deprivations plus insufficient income) is 10.5 per cent with an average of 3.9 deprivations, whereas among the indigenous people of Mexico the rate of extreme multidimensional poverty is 39.2 per cent with an average of 4.2 deprivations.

Some really interesting and positive findings. Positive in the sense that one can gain a much more accurate picture of what the problems are, and where they are. I would think that these sorts of measures would gain in popularity pretty quickly, maybe especially in Latin America. Venezuela, although not included in the preliminary findings, would stand to be an ideal candidate for this measure. Poverty measures in Venezuela largely rely solely on income, but over the last decade access to health care, education, food, etc. have, by and large, all increased dramatically. A new poverty measure may more accurately reflect that reality.

In any case, onto the data. One thing to remember though is that not all these numbers are from the same year. Bolivia for instance is calculated based on 2003 data, Argentina with data from 2005. Also, for each country measured there is a more detailed country breakdown, so if you got a hankerin' to see the complete breakdown of poverty in, say, Burkina Faso, look no further. Perhaps the coolest thing about the data is the interactive map that lets you scroll over countries, sort the data every which way, and is pleasing on the eyes as well. But, since it's not embeddable, we'll just give you less pretty, but just as useful charts. I suggest checking out the site though and playing with the data yourself.

Let's take a look at the three dimensions the MPI looks at, deprived in education, deprived in health and deprived in living standards. But first a look at the percent of people who are MPI poor, after being put through Maladjusted Charts™:

Pretty interesting stuff here. First thing that jumps out at me is the low levels seen in many countries, especially Ecuador for example, with just 2.2% of people MPI poor (2003 data). Compare this to the 51.2% poverty rate from 2004, based on CEPAL's numbers. My gut reaction is that this could be counter-productive by making it look as though poverty isn't as big an issue, although maybe it's just a reflection of some really outstanding social policies. On the other end of the spectrum, free market darling Peru has an outstanding 19.8% of her people MPI poor (the data is from 2004).  This puts Peru closer to the Central American countries than to most of South America.

Next, we'll take a look at the breakdown of those "poor and deprived in education":

So for instance Brazil, who is at the lower end of MPI poverty rates, still has a significant problem with access to education. This is the type of analysis these alternative measures allow. On the other hand, it seems like Peru's high MPI poverty rate is not being driven by a lack of access to education, but perhaps health? Let's take a look:

So, it doesn't look like access to health care is driving Peru's high MPI rate, must be the final measure, "poor and deprived in living standards". Colombia, where there is currently a pretty large debate over health care, ranks pretty poorly here with 17.5%. Argentina, middle of the road for education, has the top rank in health. Finally, a look at living standards, which includes things such as electricity, sanitation, having a floor, cooking fuel, etc.

Indeed, here we see that Peru's high MPI rate is largely driven by deprivation in living standards, even topping Bolivia and Honduras in this category. Although for the most part you can tell what is causing the MPI rates by looking at these three measures, the specific country breakdowns provided by OPHI are even more detailed and contain pretty lil pie charts like this one, for Peru:

You might need to click that for a larger image, but you can see the green shaded area (living standards) makes up the largest contribution to MPI. Although it's pretty evenly distributed, a lack of cooking fuel is a significant driver. Overall, a high level of child mortality is the leading contributor to Peru's MPI. Each country that the researchers look at are broken down like this, so I chose to look at Peru, but go to the site and pick your poison. The country breakdowns also include comparisons to the national poverty measure, and other measures like % living on $2 a day, $1.25 a day, etc.

There's a lot to chew on here, and plenty more you can find out over at the database, but definitely some food for thought. I'm not sure if this is the best measure, and as the example of Mexico shows, it may be more beneficial to tailor these indexes on a country level, although this would sure make comparisons harder. What is clear is that how one calculates poverty has a significant impact on the results, and it would certainly behoove us all to have a more accurate picture of what poverty is, and how to combat it. I'm sure there are flaws here, not the least of which is the outdated data, but I commend the researchers at OPHI and UNDP with a solid step in the right direction.

(cartoon from Polyp, check out the website for more)

Argentina, where economic growth is a bad thing

Only with Argentina, whom investors and the business community (and press) clearly haven't forgiven for defaulting in 2001, can rising GDP forecasts be reported as a bad thing. Bloomberg reported yesterday that RBS raised their estimate of Argentina's GDP growth this year from 4.4% to 7%. Amazing you might say, that would put Argentina at the top of the hemisphere, and be a seriously nice way to rebound out of the world recession, but wait. According to RBS:

“This ‘full throttle’ growth strategy is likely to exacerbate current distortions in the economy,” RBS economist Boris Segura wrote in a report today from Stamford, Connecticut. This would leave “a heavy legacy to the next administration,” Segura said.

You know, if the US undertook a serious stimulus and our GDP forecast went up that much, this would probably be straight from a set of Republican talking points. I can see it now, "This 'full throttle' government spending is only going to drive the nation further into debt. Mr. Obama is going to leave this country in ruins for whoever our next President will be."In fact, I bet they've already said that.

Just a reminder that when reading the mainstream media's coverage of Latin America, it reads more like FOX News' coverage of Obama than what passes for good journalism on domestic issues.

The Count: LAC 2009 unemployment

0.8...

...is the percentage point rise in unemployment in Latin America and the Caribbean during 2009. That's right folks, ECLAC and the International Labor Organization have a new report out, showing that contrary to fears about the potentially grim effects of the global financial crisis, unemployment in Latin America and the Caribbean only increased from 7.3 percent to 8.1.

Following almost a decade of decreasing unemployment rates, the onset of the global crisis posed the threat of erasing all that hard-earned progress. Indeed, during the first quarter of 2009 many countries saw an alarming spike in unemployment rates. So then what happened next? To quote ECLAC:

"Although the crisis caused a drop in employment, an increase in unemployment rates and the deterioration of the quality of employment, the impact was mitigated by the signs of economic recovery as of mid-2009 around the globe, the countercyclical policies adopted in many countries and the stability of the purchasing power of wages due to decreasing inflation, which restrained the fall in domestic demand."

But how did each country fare individually? Well, below are the ECLAC/ILO numbers presented all pretty like courtesy of Maladjusted Charts™:

[South America: Percentage point change in unemployment, 2008-09]

For a while now the Count has been getting a little bored of seeing Chile "bestest-society-ever" scoring highest in every freaking social indicator around (except inequality, haha!). So it is surprising to see it leading the pack in unemployment increases. But what's most remarkable about this picture is Uruguay on the opposite end, showing unemployment actually decreasing by 0.2 points.

Not bad Uruguay. Not bad at all.

More on Military Spending in South America

First off, props to Otto. I had a whole post ready to roll with pretty charts and data on military spending in South America when my RSSy turned blue and up pops "Military Spending in Latin America, 2009". So due props, but while the whole SIPRI study isn't available, the military expenditure database has been updated with numbers through 2009. So I'll add my two cents with a bit of a historical run-down. First, a look at total regional military expenditure 2000-2009 (in million US$, all $ figures are in constant 2008 dollars):



So there is clearly an increase in spending on military shit over the last ten years, but where is it coming from? Well, this provides some indication, as we break each year down by a country's share of the total:



It is a bit tricky to see since Brazil is such a large proportion, but that yellow one that gets much larger and the light blue above it...those are the only two countries who have seen their share of total regional military spending increase over the last 10 years. The countries, Colombia and Ecuador. The darker blue, all the way at the bottom (Venezuela), increases a bunch in 2006-2007, but is now at a lower level than in 2000.

Onwards; lets take a look at the major players but with some context, how about, spending per person (population numbers are from the IMF):



Again, as Otto points out, Hillary's scare stories about Venezuela just don't pan out in the data. Chile blows everyone else out of the water, spending over $300 per person. Next comes Colombia, followed by Brazil. In fact, both Ecuador and Uruguay spend more per person than Venezuela, but I wanted to include Venezuela in the above chart to make the point. Also interesting is that over the last four years, Chile's per person spending, while still significantly higher than anyone else, has been decreasing steadily. Not easy to take money from the Chilean military, who still have quite some clout, but well done by Ms. Bachelet, we'll see if Pinera can keep it up. On the other hand, Colombia continues to just spend more and more no matter how you look at it...how's that for "democratic security"? Poverty doesn't drop, military spending just keeps on rising...

Finally, as if to just hammer home the point, check out The Count breakdown how little money it would take to bring all the children in the region above the poverty line...hmm, wonder where they could come up with that....

The Count

0...

...is the number of consistent and up to date estimates of social mobility for Latin America. That's right folks, there's a real poverty of information out there and although the Count is an expert counter, he's having a hard time on this one.

Why social mobility you might ask? Well, as I'm sure you all know, Latin America has the worst income distribution in the world and if there's anything liberals like to tout it's that inequality is acceptable so long as there's social mobility. That is, who cares if there are tremendous gaps between the rich and poor so long as people born at the bottom are able to move to the top? (well, I do, but that's a different story)

In any case, last week the Count told us about the state of "human opportunity" in Latin America, showing us that although the region has a long way to go, most countries have made significant progress in achieving universal coverage of the most basic services children need in order to have an opportunity for success. But how does having access to basic services associated with "opportunity" actually translate into upward social mobility? In other words, it is one thing to have access to schooling, clean drinking water, etc. but quite another to actually be born poor and climb up the income ladder.

So instead of measuring access to services that are expected to create equal opportunity and lead to social mobility, as the World Bank's human opportunity index does, why not measure social mobility directly?

Well, because it is extremely difficult to get the data and especially so in developing countries. And even when we have good data, there are several conceptual challenges involved: do we care about intra or inter-generational mobility? (that is, changes in income within one's lifetime or from one generation to the next) Should mobility be defined purely in income terms or should it be defined using softer and often subjective variables like empowerment or self-worth?

On the data front the difficulties are equally large. To measure social mobility you need very detailed data sets that follow individuals through large chunks of time. In other words, you need to survey someone in their youth and follow up on them during their adult life. Any other approach would be a statistical abstraction. Also, to allow international comparisons it would be preferable to have comparable methodologies, something that is rarely the case.

And yet in spite of these tremendous difficulties, there are some estimates out there. The graph below is from a paper published by the World Bank in 2001 by Lykke Andersen. It's one of the few cross-country studies on Latin America out there.
Chile, Argentina, Uruguay and Peru come out on top with the highest estimated social mobility, while Guatemala, Brazil, Bolivia and Ecuador are at the bottom. Of course, these numbers are based on urban surveys and as such don't capture the whole reality of the countries in question, but they're nevertheless useful for broad comparisons.

But how does Latin America stack up against developed countries and in particular the US? This second graph below combines more recent and country specific estimates from Chile, Brazil and Peru with estimates for some developed countries.
In this case Chile, the UK and the US exhibit comparable levels of social mobility, which is either very flattering for Chile or very, very unflattering for the US and UK, the supposed bastions of liberal democracy and economic opportunity. Of course, note how far off these countries are from the more civilized nordic countries or Canada for that matter.

But it is worth mentioning that these numbers aren't comparable at all to the social mobility index in the previous graph--pointing to the shortcomings of consistent estimates noted above. Also, as someone who's lived in Canada, the US and Chile, I find these results very hard to believe. While the gap between Canada and the US makes perfect sense, such a small gap between Chile and the US is rather hard to swallow given the intense social stratification and pervasive class mentality anyone who's spent any time in Chile could tell you about.

Now, I'm obviously not saying this to defend the US, which clearly has very serious social mobility issues, but if these numbers come close to reality then Chile has made some serious social progress.

The Count: friday FDI wonkiness

40 to 50...

...is the percentage that foreign direct investment (FDI) to Latin America is expected to grow in 2010. After contracting sharply between 2008 and 2009 during the world financial crisis, FDI is expected to make a big comeback this year due largely to stronger than anticipated recovery across the region. Or at least according to Eclac's new annual report on FDI.

The climate of uncertainty, tight credit conditions, falling commodity prices and recessions across the world that followed Lehman's collapse caused FDI flows to Latin America to shrink a whopping 42% from 2008 to 2009. The biggest contractions, predictably, took place in countries that in the past have attracted the most FDI. For instance, flows to Brazil shrank $19 billion, a 42.4% decline. In Argentina, FDI flows contracted by $4.8 billion or by 49.6%.

But while in almost every country FDI, though slowing significantly, was still coming in, in Venezuela FDI just wanted to get the fuck out. In 2008 FDI inflows to Venezuela were just barely positive. And during 2009, Venezuela experienced net FDI outflows of $3.1 billion, a 990% decline! This was due mostly to the various nationalizations that took place in 2009.

But before we predict doom and gloom for the Venezuelan economy, we should remember that it's not exactly Greece, has plenty of oil cash lying around, and just signed a $20 billion deal with China to develop it's heavy crude refining capacity.

Whatever. In any case, the regional decline is indeed quite impressive. But why don't we put it in perspective? The graph below shows FDI flows to Latin America and the Caribbean between 1990 to 2009 in billions of dollars.

As can be seen, the lead up to the 2009 crisis was nothing short of an FDI bonanza. In fact, 2007 and 2008 were historical records for FDI. And even after its huge decline, FDI inflows in 2009 were still the 5th largest ever recorded. In other words, FDI flows to Latin America have wethered the crisis quite well, all things considered.

On a compositional note, the sharpest decline between 2008 to 2009 was in FDI flows to natural resource extraction. As can be seen below, this surged in 2008 coinciding with the large worldwide rise in commodity prices. The share of the service sector, the largest recipient of FDI, remained more or less at its 2008 level.But while FDI flows to the manufacturing sector retook the second place, its technological content remained weak. Moreover, Eclac notes that the technological content of FDI to Latin America has been low accross the board. This takes us to our final graph:
The graph above divides all announced FDI in Latin America into "low", "medium-low", "medium-high", and "high" technology content. As can be seen, low and medium-low dominate new FDI inflows.

This is a big problem because one of the biggest supposed benefits of FDI in textbook economic theory is that it transfers technology to developing countries, leading to positive "spillovers" into other industries and thus increasing overall productivity. Of course, no one seriously believes that FDI in and of itself leads to technology transfers and productivity growth. Smart developing countries, like China for instance, have always used industrial policy to harness FDI to suit their development strategies. It's a real shame that so many countries in Latin America have abandoned this type of thinking.

Investor-state lawsuits related to mining and hydrocarbons on the rise in Latin America

The Institute for Policy Studies, a lefty think tank based in Washington, DC, has a new report on international arbitration related to mining and hydrocarbon investments. Mining for Profits in International Tribunals, authored by Rebecca Dreyfus, Sarah Anderson and Manuel Perez Rocha, details how Latin America has been hit the hardest by the rise of investor-state lawsuits.

As the Count told us back in march, international corporations have been increasingly using provisions contained in Bilateral Investments Treaties (BITs) and Free Trade Agreements (FTAs) that allows them to sue governments for policies that might impact their bottom line. In other words, corporations can seek compensation for policies that, say, seek to mitigate the environmental and social consequences of resource extraction. These investor-state provisions allow corporations to bypass domestic courts and sue governments in the secretive and notoriously scummy International Court for Settlement of Investment Disputes (ICSID), housed at (where else?) the World Bank.

Never mind the irony of housing a supposedly unbiased court of law in an institution known for prioritizing corporate interests.

One recent case at ICSID pits tobacco giant Phillip Morris International against the government of Uruguay for strengthening health warnings on cigarette packages. A few months ago Uruguay introduced a new law raising the portion of cigarette packs that had to feature health warnings. Phillip Morris considered this detrimental to its bottom line and took advantage of investor-state provisions in the BIT between Uruguay and Switzerland (where Phillip Morris International is based) to demand compensation for lost profits.

But suing for public health measures is only one example of how investor-state mechanisms are being used to fight public interest policies. According to the report, the last decade has seen an explosion in investor-state lawsuits related to natural resource extraction:

"At the most frequently used tribunal, the International Center for Settlement of Investment Disputes (ICSID), there are 128 pending cases. Thirty-two of these cases are related to oil, mining, or gas. By contrast, ten years ago, there were only three pending ICSID cases related to oil, mining, or gas. There were only 7 such cases filed during the entire decades of the 1980s and 1990s."

What's more, Latin American governments have been disproportionately targeted. The pie chart below shows all mining, oil or gas cases currently pending in ICSID by region. As can be seen, cases against Latin American governments overwhelmingly outweigh every other region of the world.

As the report notes:

"Latin American governments make up about 9 percent of the 155 ICSID member governments. And yet they are the targets of 70 (55 percent) of all ICSID cases and 21 (nearly two-thirds) of the 32 extractive industries cases."

But don't listen to me. Go read the report yourself and find out about loads of more interesting stuff on the subject, including the history of investor treatment in Latin America and a few good case studies worth checking out too.

Quote(s) of the Day

First, from Miguel d'Escoto the former President of the UN General Assembly on the US' role in the region, via Democracy NOW!:

We need the United States as much as we need arsenic, and that is the fact. We don’t need it. We would need it, if they wanted to join the rest of humanity and together work for a better future for all of us, but they are not doing that. They are instilling, they have instilled, a culture of death, of greed, of selfishness. And this is killing the world.

Word. And secondly and more comical, from Colombia presidential candidate and former Defense Minister Juan Manual Santos, describing the differences between him and Antanas Mockus, via Colombia Reports:

"I am different from him in many ways. Firstly, I shaved off my beard. I believe in God. I believe in having an army."

My preference is for beards...and atheism and no army for that matter...

How did Latin America survive the global credit crunch?

Back in 2008, after the Lehman collapse, bank lending to emerging markets contracted sharply. But while bank lending was retreating in Eastern Europe and emerging markets in Asia, it shrank comparatively little in Latin America. Why?

A partial answer can be found below, courtesy of a new working paper from the IMF.

[Share of foreign banks' lending through their local affiliates, 2008 (in percent of total)]

When talking about foreign bank lending it's important to distinguish between cross-border flows (when a foreign bank lends to another country from its headquarters abroad) and lending by foreign banks' local affiliates. The graph above shows that unlike other emerging market regions, foreign bank lending in Latin America is mostly conducted through their local branches.

This type of lending is much more stable than cross-border flows, in large part because loans by foreign banks' local affiliates are mostly financed by local deposits. These types of loans are also more likely to be denominated in domestic currency, which as can be seen below, turns out to be the case in Latin America.

[Share of foreign banks' lending denominated in domestic currency, 2008 (in percent of total)]

But there's another piece of the puzzle. The largest foreign banks in Latin America, Santander, Scotiabank and BBVA, to name a few, did not have large exposures to Eastern European markets, which made it less likely for tough conditions over there to affect lending in Latin America.

So in sum, it does indeed seem like Latin America is atoning for its original sin, and if foreign bank flows are to be taken advantage of, countries should promote the type that takes place through their local affiliates.

IMF backpedals its endorsement of capital controls

Maladjusted's readers may know that after being snubbed by developing countries because of its horrible policy advise, the IMF had a midlife crisis and was forced to do a little soul searching. But right when it was on the brink of utter irrelevance, the global financial crisis hit and the ailing institution was given a new lease on life. In the process, headed by french "socialist" DSK, the IMF began reevaluating many of its long held dogmas.

Most recently, the IMF came out in favor of using short-term controls on capital inflows. This was considered a BIG FUCKING DEAL, and rightly so, but the details of how this would translate into actual policy were anything but clear. So now it shouldn't exactly come as a surprise that the IMF seems to be softening it's support for capital controls--that is, taxes and restrictions on moving capital across national borders.

A little background might be in order.

Throughout the '80s and '90s, the IMF encouraged developing countries to liberalize their financial markets and to do it fast. Free market types basically believed that doing this would promote the efficiency of financial markets, channeling funds to where they were needed most and thus leading to better economic growth.

Well, at the beginning of the '90s many developing countries began to liberalize and, due to a combination factors, were faced with massive inflows of foreign capital. To simplify, the US Fed had pushed interest rates down to help the US recover from a recession, prompting investors to look elsewhere for places with higher rates. At the time, Latin America was just such a place. Moreover, apart from having high interest rates, most countries in the region had spent the last decade--the lost one--pursuing neoliberal reforms that investors perceived favorably.

In any case, countries that had been cutoff from international capital markets for years suddenly experienced a huge surge of foreign capital inflows. The problem, however, was that when it comes to capital flows you really can have too much of a good thing. It quickly became apparent that these large flows of foreign capital carried significant risks and posed a challenge to macroeconomic management.

One side effect of capital inflows is that it puts pressure on your currency to appreciate and for many of these countries, which were pursuing an export-led development strategy, this was a big problem.

Many of these countries were also concerned with a loss of monetary policy independence, meaning that the abundance of foreign money was pushing interest rates down despite the wishes of central banks to keep them high in order to fight inflation.

Policy makers were also concerned that these large inflows could make countries more vulnerable to financial crises. In particular, Latin American banks took advantage of all this cheap foreign money and borrowed excessively short-term and in foreign currencies, which put them at risk if the inflows were to stop and the currency to collapse.

The point of this story is that one country in particular managed to juggle all these problems quite well and it did so using capital controls. This country also happens to be the free market darling Chile (Colombia and Brazil have used similar controls with varying degrees of success).

Another famous success story comes from Southeast Asia during the Asian financial crisis. Facing massive capital flight, Malaysia broke with the IMF and imposed temporary controls on capital outflows to prevent it's economy from collapsing. Its economy proceeded to recover rapidly.

Whatever. So now, in spite of mounting evidence and it's own endorsement, the IMF is warning that capital controls could cause significant distortions:

"Since the use of capital controls is advisable only to deal with temporary inflows, in particular those generated by external factors, they can be useful even if their effectiveness diminishes over time... However, the decision to implement capital controls should consider their distortionary effects not just on the individual country, but also on the global economy in the event their use were to become widespread."

To be fair, there's nothing wrong with this statement. Controls on capital inflows shouldn't be used as an excuse to avoid pursuing meaningful macroeconomic adjustments and if controls become widespread they might slow global recovery (a rather large claim backed by little evidence). But it's clear that there are actors within the IMF trying to prevent capital controls from becoming standard policy. So before we rush to the conclusion that the IMF is seriously reconsidering it's long-held policy stances, we should wait to see how it's endorsement of capital controls translates into actual policy.