Economic Growth and its Impact on Poverty Eradication.
September 3, 2024
Topic of the week:
The belief that economic growth is the solution to eradicating poverty has been around for decades. However, this idea is increasingly being challenged by experts who argue that economic growth alone does not address the roots of inequality and poverty.
To understand the proposed debate on economic growth, it would be important to clarify its definition. According to international organizations such as the UN, the IMF and the OECD, economic growth is not limited to a simple increase in a country’s production and wealth. This concept also encompasses improvements in the quality of life of the population and in the economic and social structure that promotes balanced and sustainable development. Traditionally, Gross Domestic Product (GDP) has been the standard metric for measuring economic growth. GDP quantifies the total value of all goods and services produced in a country during a specific period. The importance of this measure goes back years when historical economic thinkers were considering different theories. Adam Smith, in his work “The Wealth of Nations” (1776), highlighted the increase in production as the main indicator of economic progress. Later, John Maynard Keynes, during the Great Depression (1929), also stressed the importance of production and employment as indicators of economic well-being.
Today, international organizations such as the World Bank, the IMF and the OECD continue to use GDP as the key to assessing countries’ economic growth. However, this metric does not capture all aspects of development and well-being, which give a more holistic view of economic growth. Olivier De Schutter, UN Special Rapporteur on extreme poverty and human rights, argues that the obsession with GDP growth has had negative consequences. He says this approach has led to environmental devastation and increased inequality, with a minority part of the population accumulating wealth while a large part of the population continues to live in extreme poverty.
Despite showing positive economic growth, many countries in the Global South have failed to significantly reduce poverty. This is because increased production and wealth often depend on the exploitation of cheap labor and the extraction of natural resources, benefiting countries in the Global North. This dynamic is causing us to fall into an ever-deepening cycle of poverty and inequality. As an example we have countries like India, which despite being one of the fastest growing economies in the world, with a projected GDP growth of around 7% in 2024 according to the IMF, continues to face high levels of extreme poverty. Approximately 10% of the Indian population lives on less than USD 2.15 per day. Other examples could be countries such as Ecuador and Bangladesh, which face persistent challenges of extreme poverty and inequality. On the other hand, we see how countries like Sweden and Denmark have managed to combine economic growth with high levels of social welfare and low inequality, demonstrating that it is possible to achieve inclusive and equitable development. These countries of the Global North have achieved a good quality of life for the population, with a solid economic and social structure that, in turn, promotes balanced and sustainable development.
Other experts have proposed alternatives to the traditional approach to economic growth. Dani Rodrik, an economist at Harvard University, suggests that growth policies must be accompanied by structural reforms in areas such as education, health and social protection in order to be effective. In addition, several studies have shown that economic growth in recent decades has benefited the richest, increasing inequality rather than reducing it. The economist and Nobel Laureate Amartya Sen (1998) proposes that development should be measured in terms of “capabilities” rather than income. According to Sen, true development occurs when people have the freedom to live the lives they value, which requires access to education, health and other basic opportunities.
Other agencies have proposed alternatives to measure progress in a more comprehensive manner. For example, the United Nations Development Programme (UNDP) developed the Human Development Index (HDI) in 1990. The index was created under the leadership of Mahbub ul Haq, a Pakistani economist, with the collaboration of Amartya Sen. The HDI was designed as a more comprehensive measure of human development than those that focused solely on economic growth, incorporating dimensions such as life expectancy, education and per capita income. Measures such as this give us a more comprehensive view of development, integrating economic wealth, quality of life and access to basic opportunities. The latest Human Development Report (published in 2024 with 2022 data) confirms the rise in global inequalities, reversing pre-pandemic gains. Iceland, Norway and Denmark lead the ranking, while in Latin America, Chile ranks first. In Africa, many countries are among the lowest ranked, with the Central African Republic, South Sudan and Somalia at the bottom.
World map of all countries according to the inequality-adjusted Human Development Index in 2024 (2022 data).
Economic growth, as traditionally promoted, is not enough to eradicate poverty. We must adopt a more holistic approach that prioritizes human well-being and fundamental rights. Only then can we move towards a more just and equitable world.
The beacon of markets:
The close of August in the equity markets has left us, for yet another month, with a positive balance in almost all the major indexes. This in spite of the “scare” given by the stock markets in the first week of the month, where we saw accumulated losses of over 10%. Despite the magnitude of these losses, they recovered immediately. Generally speaking, it can be said that sentiment remains positive for risk assets. The US economy is showing a certain slowdown through its macro data, although it is unlikely to enter recession, and furthermore, to give investors greater confidence, it seems that we will see interest rate cuts by both the FED and the ECB as early as September, which will reduce the financial cost for the majority of companies.
The last week of the month passed with few changes in the US stock markets despite the correction experienced by Nvidia, whose second-quarter results, although very good, resulted in an outlook below analysts’ estimates for the second half of the year. In Europe, rises were around +1% due to the lower technology component in its indices.
The impact on fixed income was much less significant simply because the first rate cut by the Fed in September had already begun to be discounted in July. As a result, August saw only a slight drop in yields compared to the previous month. The 10-year Treasury was down 12 bps to 3.91%, while the Bund and US Treasury were unchanged at 2.30% and 3.12% respectively. However, they have not been free of volatility, for example, the Treasury traded with a yield of 3.67%.
As for alternative assets, gold set a new all-time high at $2,570.40/oz, positively affected as a safe haven and by the imminent interest rate cuts. With regard to Brent, there were several determining factors that led to a fall in its price. September has started with prices at $76.50/b, which will certainly help to continue lowering inflation levels throughout September if prices remain at these levels. The key factors are mainly two: i) the Chinese economy is still not picking up, and the local real estate market is still in crisis, causing a strong loss of purchasing power that is affecting domestic demand and ii) OPEC has communicated that it is very likely that there will be an increase in crude oil production by several of its members starting in October.
At the macroeconomic level, it should be noted that the references that have become known in recent times suggest that economic activity in the US has not slowed down abruptly and therefore, we could see a reactivation in the second part of the year. But what supports the Fed’s future decision is that data directly related to employment and inflation no longer appear to be a danger to the economy. Among the latest data, we highlight the good evolution of consumer confidence, durable goods orders (PMI from the University of Chicago) , and the very remarkable revision of US GDP for the second quarter which came in at 3% versus 2.8% in the first estimate and which contrasts sharply with the 1.4% of the first quarter. The other key reference was the personal consumption expenditures index (PCE), which fell one tenth of a point to 2.5% versus the 2.6% estimated.
September starts with important data such as the manufacturing orders indexes (PMIs) in Europe and the US, the presentation of the Fed’s Beige Book and the employment data in the US. At this time, the market believes that depending on the data published, the Fed will choose to lower by 25 or 50 basis points. The forecast is that the unemployment rate will improve to 4.2% (4.3% previously) and this will give the FED room to lower only 25 bps (which is apparently what they want, to ward off the danger that a larger lowering would entail both in the real economy, and in analysts’ perception of the state of the country’s economic health).
The sentence:
And we bid farewell with the following phrase from Alexander the Great: “upon the conduct of each depends the fate of all”.
Summary of performance of main financial assets (2/9/2024)
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