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Poverty Reduction and Economic Growth

By ·February 2, 2020
Oxford University

The Issue:

In order to combat poverty, researchers have increasingly focused their efforts on randomized controlled trials — an experimental approach commonly used in medical research — to determine the effectiveness of anti-poverty programs and interventions. One question that remains, though, is how much overall reduction in the poverty rate one can expect from projects, programs or policy interventions that raise the well-being of those in absolute poverty at a given level of income, versus how much poverty reduction comes from broad-based economic growth.

The Facts:

  • In the last quarter century 1.1 billion people, about one-seventh of the world’s population, have been lifted out of extreme poverty. Yet progress has been uneven across different regions and significant challenges remain. 
  • There is an extremely tight relationship between median income and poverty rates across countries. Using data for 633 observations on 141 countries and the poverty threshold of $5.50 per person per day, the correlation between poverty rates and poverty predicted on the basis of median income alone is 99 percent. This means that pretty much all of the variation in poverty rates across countries can be accounted for by their differences in median income. No country with median income per capita below $2558 per year ($7.00 per day) had less than a third of the population living in poverty (see chart). 
  • None of this analysis turns on the magnitude or efficacy of countries’ anti-poverty programs. But that is precisely the point. One can predict extremely accurately the level and change in absolute poverty (at a variety of threshold poverty levels) without any references to changes in the distribution of income below the median level, which would be the type of change that one might imagine anti-poverty programs target. 
  • Determining what promotes sustained growth for poor countries and how to implement policies that increase or sustain growth, however, remain deep research and policy challenges.

What this Means:

Broad-based growth, defined as the process that raises median income, is far and away the most important source of poverty reduction. There is no instance of a country achieving a headcount poverty rate below 1/3 of its population (at moderate poverty line of $5.50) without achieving the median consumption of that of Mexico. This is not to say that there do not exist anti-poverty programs that are cost-effective and hence should be expanded, or, conversely, that there are anti-poverty programs that are not cost-effective (or even have zero impact on poverty) and should be cut back or eliminated. Analyses of these types of programs would enable a more efficient use of resources devoted to poverty reduction. But large and sustained improvements in global poverty will almost certainly have to focus on how to raise the productivity of the typical person in a poor country, which is a key source of national income growth.

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Government Budget Deficits and Economic Growth (UPDATE)

By ·February 1, 2020
Fletcher School, Tufts University

The Issue:

The Congressional Budget Office (CBO) forecasts that the U.S government budget deficit will average more than 5 percent of GDP in the last three years of this decade. In contrast, the Trump Administration forecasts the budget deficit being 1.5 percent of GDP in 2028 and 0.6 percent of GDP in 2029. Why are the projections so different? And, why does it matter?

The Facts:

  • The size of the federal budget deficit is tightly linked to how well the U.S. economy is performing. When the economy grows at a faster rate, this raises tax revenues and tends to lower spending on social safety net programs, both of which help to reduce the budget deficit, even with no change in spending or tax policy. During a recession, the budget deficit increases. (See chart. The green line represents the GDP Gap, an indicator of the performance of the economy.)
  • Projections of the federal budget deficit depend critically on economic growth expectations. The administration's view is based on the assumption that the United States can average GDP growth rates of 2.9 percent through the end of the 2020s. In contrast, the CBO projections are based on an assumed average economic growth rate of 1.7 percent in the years 2020 to 2029.
  • An ongoing growth rate of almost 3 percent over the coming decade is at odds with other forecasts and analyses of likely United States GDP growth.

What this Means:

Large government budget deficits may be warranted at times when the economy is in a downturn in order to stimulate spending and mitigate economic weakness. But large deficits that occur when the economy is at or near its full-capacity raise concerns of increasing costs of borrowing, reduced private capital formation, and potential financial and economic destabilization. Deficits can shrink with strong economic growth, but the combination of likely policies and plausible GDP growth rates for the United States point towards rising deficits over the next decade.

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What Aspects of the WTO is the Trump Administration Targeting for Reform?

By ·January 28, 2020
The Fletcher School of Law and Diplomacy, Tufts University

The Issue:

Two areas that the Trump administration has consistently targeted for reform at the World Trade Organization (WTO) are its dispute settlement mechanism and its special treatment for developing countries.It is not clear, however, that addressing these issues will provide significant net economic benefits to the U.S.

The Facts:

  • The dispute settlement system at the WTO provides an established process by which countries can resolve trade issues, and the WTO treaty prohibits countries from taking matters into their own hands. The U.S. has been working to undermine the dispute settlement system. Effectively, this has meant that, as of December 2019, there are not enough members for the Appellate Body, the WTO’s “supreme court.” to operate. This precludes appeal of panel decisions, making it possible for states that violate WTO law to prevent adverse WTO rulings from attaining legal effect. 
  • In recognition of the benefits of the dispute settlement system, the European Union and 16 other member states agreed to develop a substitute appeal mechanism at the WTO, but only for disputes among themselves.This will likely disadvantage U.S. companies in these countries, compared to companies from countries within this group, unless the more bilateral, power-based system of addressing foreign trade barriers espoused by the Trump Administration becomes successful in addressing trade barriers abroad.  
  • The Trump Administration has also attacked the use of Special and Differential Treatment (SDT) for developing countries. Under WTO practice, countries “self-designate” as developing countries; China, India, Brazil, and a number of other countries, as well as Singapore, South Korea, and Israel, are all counted as developing countries. The Trump Administration argues that: "while some developing-country designations are proper, many are patently unsupportable in light of current economic circumstances." 
  • There is debate about whether Special and Differential Treatment for Developing Countries actually benefits them.

What this Means:

After the U.S. renegotiations of the U.S.-Korea and NAFTA/USMCA free trade agreements, one might be forgiven for wondering whether the changes that the Administration is demanding of the WTO will be as dramatic as advertised, and whether they will have significant economic effects. But it will be politically important to address U.S. concerns. There is room for some reasonable amendments to WTO dispute settlement and WTO rules relating to developing countries. It is unclear what concessions Director-General Azevêdo can deliver. While reforms of dispute settlement and developing country status would not have great economic significance, the WTO needs to make progress on digital commerce, global warming, fisheries subsidies, state-owned enterprises, and a host of other issues of much greater significance.

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Will the Public Charge Rule Reduce Safety Net Expenditures? (UPDATE)

By ·January 27, 2020
Williams College

The Issue:

The Trump administration’s  “public charge” guidance aims to discourage non-citizen participation in federal safety net programs and to deny admission to the country to those deemed likely to become a burden on the state. Under the new guidance, the administration will factor in the use of non-cash safety net programs (notably Medicaid and SNAP) in determining admission to the United States and changes of status.

The Facts:

  • Public charge is not new, but under the rule it will take on new significance in immigration decisions. The consideration of whether someone is likely to become a public charge plays a role for people applying for admission from outside of the country, and for those already in the U.S. seeking to change status—those seeking to acquire permanent residence (green cards) in particular. 
  • Undocumented immigrants are largely excluded from the safety net, and are therefore not directly affected by the public charge rule. Undocumented immigrants are able to apply for assistance on behalf of their citizen children, however, so may live in a household receiving SNAP or Medicaid. 
  • Fear and confusion around the public charge rule may have a bigger impact than the letter of the law. Between March 2018 and March 2019, SNAP participation fell in low-income families with immigrants compared to the prior year, but rose slightly for households without any immigrants (see chart). It is difficult to determine how much of this trend was due to the public charge rule’s proposal in 2018 rather than other factors related to policy, the economy, or statistical noise in the survey data.
  • If “chilling effects” are sufficiently large, the public charge rule could generate noticeable reductions in SNAP and Medicaid spending. Although only 14 percent of SNAP household residents are themselves foreign-born, about 27 percent of residents of SNAP households live with at least one immigrant. For Medicaid, there is a similar story:  14 percent of Medicaid participants are foreign-born and 32 percent of Medicaid participants live with at least one immigrant.

What this Means:

Even though immigrants represent a small share of beneficiaries of the SNAP and Medicaid programs, “chilling effects” from the public charge rule could generate noticeable reductions in program participation and costs. Almost half of those affected would be U.S.-born citizens (mainly children) living in households with immigrants.

  • Editor's note: This post has been updated to include a January 27, 2020 decision by the U.S. Supreme Court to allow the Trump administration to begin enforcing the rule. The post was originally published on January 8, 2020.

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    What Are the Financial Risks From Climate Change?

    By ·January 21, 2020
    University of California, Santa Cruz

    The Issue:

    Although the worst predicted impacts of climate change are still far away in the future, some financial risks associated with climate change and climate change mitigation efforts are more imminent.

    The Facts:

    • The frequency of high-cost climate and weather disasters increased over the past four decades in the United States (see chart). Agriculture, infrastructure, human health and productivity, tourism, businesses, and financial markets are already affected by extreme weather events becoming more frequent. The risks of such losses becoming more widespread as global temperatures continue to rise are frequently referred to as physical risks.  
    • Much less broadly recognized are “transition” risks that come from potential climate change mitigation efforts via government policies or changes in consumer and investor behavior. Divestment by large and high-profile funds from fossil-fuel related assets and companies, or rapid switch of consumer demand to alternative transportation and utilities can lead to sharp repricing of financial assets associated with fossil fuel and related industries. Some assets, such as coal-industry related assets may become “stranded,” with their value dropping to zero.  
    • Financial institutions that are highly exposed to such industries and assets may then experience losses that have potential of generating systemic financial stability problems. Such risks may materialize much sooner than physical risks. Some central banks now include assessment of financial risks related to climate change in their financial stability reports and special publications.  
    • Recognizing transition risks would help the financial sector to reduce their exposure to assets and industries that are subject to these risks. The main challenge in this effort is the ability to classify assets and industries into “green”, “brown”, and “neutral”. Such a taxonomy could also be used to facilitate other issues of “green” financial instruments.

    What this Means:

    Recognizing transition risks would allow for more gradual divestment from assets that are subject to repricing or may become stranded, which by itself will help transition to carbon-free economy. The importance of transition risks is just beginning to be recognized by the financial industry and policymakers.

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