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Everything you think you know about poverty is wrong

Lant Pritchett speaks at the Sept. 24, 2010, conference organized by Australian Agency for International Development (AusAID).
Lant Pritchett speaks at the Sept. 24, 2010, conference organized by Australian Agency for International Development (AusAID).
Darren Boyd, ANU College of Asia & the Pacific

Before Lant Pritchett even took the podium at the Wheatley International Affairs Conference in Sundance, Utah, observers might have sensed that the former World Bank economist and Harvard professor wasn’t going to give a conventional speech on global poverty. A pair of blazing yellow socks signalled to the crowd that Pritchett is a man who marches to the beat of his own drum.

Over the course of the next 40 minutes, he made the case to a crowd of international development academics and students from around the country that everything they knew about poverty was wrong.

Pritchett joined the World Bank in 1988 after completing a Ph.D. in development economics at MIT. Development economics is the branch of economics that focuses on how to improve the economic and political institutions in Third World countries. Pritchett quickly became notorious for challenging truisms about poverty and international development.

“Before you get into a discussion about development, there are some things you need to know," he said at the conference.The things Pritchett thinks people should know about poverty are as unexpected, and interesting, as his yellow socks.

Rich people in poor countries are poor

When we think of rich people in poor countries, we tend to imagine billionaires living in opulent palaces, Pritchett said. In fact, the number of truly wealthy people in poor countries is statistically insignificant. “The truth is, rich people in developing countries are much poorer than the poor in rich countries,” said Pritchett.

While comparing wealth across borders is not easy, one method is to look at food spending. Historically, there has been a consistent negative correlation between a person’s wealth and the percent of their income spent on food. In other words, if you must spend almost all of your money on food, you probably aren’t doing that well.

The bottom 10 percent of Americans spend about 17 percent of their income on food, according to Pritchett. By contrast, the top 10 percent in India spend almost 40 percent of their income on food, Pritchett said. Even poor Americans haven’t spent this much on food since the 19th century — before the widespread adoption of cars, electricity and indoor plumbing.

People are poor because of where they live, not because of who they are

The typical unskilled laborer in Haiti makes about 80 cents an hour. If that same person moves to the United States, studies show they will earn about $8.50 an hour. So why are Haitians poor? It is not because they are lazy or uneducated, Pritchett said. Haitians are poor because they live in a society that cannot make productive use of their labor.

Pritchett outlined four aspects of society that are different in developed countries. These well-off countries have a productive economy, a government that is responsive to the citizens, a capable bureaucracy, and the rule of law. Digging wells in Haiti might provide a bit of relief to that country's poor, but it isn’t going to change any of these four things, Pritchett said. In fact, many kinds of humanitarian aid may short-circuit the development, he said. Until a country develops institutions that make productive work possible, its people will remain poor, he added.

Education and technology aren’t the answer

One common belief among people working in international development is that a poor country can be changed by improving its education system, but Pritchett’s research suggests otherwise. The problem in poor countries is that they cannot make effective use of their people’s skills, Pritchett said, so giving them more skills does lead to development. Counter-intuitively, his research has shown that countries whose education system improves actually grow slower on average. He suggests that one reason for this may be that putting more educated people into a corrupt bureaucracy may result in more sophisticated corruption.

Many technological developments are also counterproductive for countries trying to escape poverty, he said. Since unskilled labor is relatively expensive in countries like the United States, a lot of money has been spent on developing things like ATMs and self-checkout lanes in grocery stores to reduce the need for unskilled labor, he said.

After these technologies are perfected in the developed world, they often become cheap enough to be used in countries with a huge supply of unemployed, unskilled laborers, Pritchett said. This further reduces the demand for their labor and makes it much more difficult for them to escape poverty.

The best way to help the poor is to let them work in industrialized nations

So what can we do to help the poor in Haiti or India or Bangladesh? Pritchett advocates letting them come to developed economies as temporary workers. Whether a person lives in poverty is determined almost exclusively by the country they are born in, and the policies of rich countries exacerbate the problem, he said.

“The principal way rich countries disadvantage the poor world is not through unfair trade, or through intrusive and ineffective aid, or by forcing repayment of debts,” Pritchett wrote in his 2007 book, "Let Their People Come." “The primary policy pursued by every rich country is to prevent unskilled labor from moving into their countries. And because unskilled labor is the primary asset of the poor world, it is hard to even imagine a policy more directly inimical to a poverty reduction agenda or to 'pro-poor growth' than one limiting the demand for unskilled labor.”

Allowing for labor mobility won't solve problems in developing countries, but it is a way to help the people who live there, he said. Working temporarily, Prichett suggests, three-year visas would give the poor an opportunity to earn a substantial amount of money, money that could change the trajectory of their lives when they returned home.

Pritchett insists on the temporary nature of the visas. In part it would be essential because it would give more people an opportunity to work. But family responsibilities are also a consideration. He doesn't believe it is good for families to be split up for 20 years while the husband works in one country and the wife in another.