Global poverty: Here's how to really reduce it

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CNN.com | October 6, 2015
By Parag Khanna

Johannesburg, South Africa (CNN) -- Driving around Sandton, you could be forgiven for thinking that you were in a high-tech corridor of San Jose, California.

The difference is that Sandton lies right in the middle of Gauteng -- South Africa's fast-growing capital region, which encompasses Johannesburg and Pretoria, and has a combined population of almost 13 million. Many of them are poor black people living in townships and inner-city areas.

South Africa's history is unique, of course, because of colonialism and apartheid, but Gauteng is a microcosm not just of South Africa, but of the whole world.

It seems like a new Sandton-like district pops up somewhere in the world every year. In just the past few months, I have visited similar enclaves such as Gurgaon outside New Delhi, Bandra in Mumbai, Makati in downtown Manila, and the Ciputra complex in Jakarta.

From Sao Paulo to Istanbul to Bangalore, the more populous and globally connected cities become, the more their countries feature a double stratification -- not only between urban and rural but also between these wealthy urban cores and the expanding peripheries of underclass neighborhoods and slums.

READ: Inequality can be dismantled at the root

Is falling poverty a sign of a rising middle class?

These growing swathes of the world, including parts of the U.S., simultaneously embody characteristics of both the developed and the underdeveloped world. Data from a Pew Research Center report published in July suggest that, though poverty is falling worldwide, the middle class is barely growing: Only 13% of the world population can be considered truly "middle income," defined very modestly as living on $10-$20 per day.

Urbanization has further accelerated the inequality that has been created by globalization. A decade ago, the Gini coefficient (the standard measure of income inequality) was greater across the world's countries -- think of the "North versus South" rhetoric of the anti-globalization protest movementsthat assaulted the annual Davos gatherings. Now it is often greater within countries -- think "Occupy Wall Street." According to OECD data from 2013, the U.S. is the fourth most unequal country, after Chile, Mexico and Turkey.

READ: Silicon Valley can afford to end poverty

How does urbanization benefit society?

For those leaving rural feudalism behind, however, urbanization also brings never-before-experienced opportunities for education, healthcare and work. In India, NGOs operating at the perimeters of the country's burgeoning cities often issue newcomers with something else they've never held in their hands before: identification. And these migrating masses are not just recipients of largesse. For multinational companies, the more than 50% of the world population now living in major cities is the global market. The world economy needs urbanization for growth, but urbanization is also a chief culprit in exacerbating inequality.

We will continue to live with severe inequality for decades to come. While the gap between the median income of America's richest (Maryland) and poorest (Mississippi) states is just about double, the GNI per capita gap between Asia's richest and poorest nations -- Singapore and East Timor -- is about fourteen-fold.

Whatever happens in the U.S., the country with a population of 318.9 million will ensure that global inequality remains a statistical reality. As world leaders and activists gathered in New York at the Sustainable Development Summit to renew commitments to combat inequality, this should have been kept in mind.

Are governments spending enough?

Ernst & Young's gargantuan Africa headquarters in Sandton bears the company's motto of "building a better working world" -- something South Africa's government clearly has little idea how to do. Nearby, Nelson Mandela Square features expanding malls and hotels that create thousands of jobs for security guards, store clerks, bus boys and drivers. Is the government doing any better? South Africa's youth unemployment is estimated at almost 50%, with many no longer even looking for work.

There aren't enough people actually earning incomes to raise the tax base, while cutting spending is political suicide given massive welfare dependency. Public works projects like a new central business district for Johannesburg are the order of the day creating more jobs in the urban core, to be sure, but widening inequality further in the process.

The trend itself cannot be reversed, but that doesn't mean we should ignore inequality or that there's nothing to be done about it. We just have to understand that it is a consequence, not a cause, of global economic dynamics, technological patterns and policy outcomes. We need a different approach, focused not on redistributing pieces of the existing pie but on growth, wealth creation and investment.

China alone represents more than half the nearly 400 million people who entered the middle class between 2001-2011, with South America and Eastern Europe also adding double-digit millions as well. With more than one billion people each, India and Africa still lag far behind in broad based poverty reduction.

So how do we actually reduce poverty?

The key to reducing poverty, building wealth, and maybe reducing inequality, is access: to infrastructure, finance, education and the other basics that enable mobility, build skills and promote entrepreneurship. The way to make more of the benefits of the global economy available to mopre of the world's people, according to the economist Carlota Perez of the London School of Economics, is to accelerate the transition from the "installation" phase of new technologies to the "deployment" phase of wider investment.

This has been the pattern since the Industrial Revolution, with clusters of infrastructure such as canals, railways, electricity, highways, telecoms and the Internet. As each innovation moves from lab to marketplace, it generates entirely new industries, business models and jobs.

Former World Bank chief economist Justin Lin convincingly argues that infrastructure and investmentare the one-two punch that builds the foundations for individual empowerment and productivity. A recent World Bank study of southern China has shown how crucial urbanization and high-speed rail and transportation networks have been for the region's rebound since the post-financial collapse of exports.

Workers, sales people and entrepreneurs all followed the market, relocating to places with better opportunities, often to inland areas where the government has been trying to promote urbanization.

In Guangdong province, the growing proximity of people to economic activity enabled productivity growth at double the rate expected for countries at China's level of development. Latin America, Africa, the Middle East and South Asia—the entire rest of the developing world—should take away this simple lesson: Infrastructure levels the playing field.

High taxes in America have worked in the past, hasn't it?

Advocates of higher taxes as a solution for the problem of inequality in the U.S. often point out thatAmericans grew together during the 1960s, when marginal tax rates were highest. But what all Americans were truly benefiting from then were massive public investments, such as Truman's "Fair Deal" Housing Act of 1949, which expanded low-income housing and mortgage insurance, and Eisenhower's 1956 interstate highway system.

Interval studies have argued that the latter added a peak of $38 billion annually to the U.S. economyby reducing costs of transportation and increasing productivity, and over the 40-year period to 1996 had generated more than $1 trillion in cost reductions.

But America's highways and bridges have fallen into disrepair, with the Society of Civil Engineers calling for $1.6 trillion between now and 2020 for an overhaul. Given that U.S. census data reveals that truck driver is the single most common job in almost all 50 states, they have a point.

Are highways the only essential infrastructure?

No. Since driverless trucks may endanger the jobs of a significant number of America's 8.7 million truckers, we need to think about installing more fiber-optic cables as well. American cities with municipal or tech company-funded broadband service have the country's fastest download speeds, the same as Zurich and Seoul. Kansas City, the nation's fastest, happens to be ground zero for the 1000 mbps Google Fiber service. Google also made an investment of $1 billion in Lafayette and LA.

In South America, the most urbanized continent, a Canadian study by IDRC reports that countries such as Chile and Colombia that have boosted investment in broadband networks have demonstrably raised wages and employment, and brought greater efficiency to labor markets and transparency to commodities pricing. Whether down there or up here, from engineering and construction jobs to improvements in K-12 curricula, the overall economic and social benefits of digital infrastructure deployment are difficult to quantify because they are priceless.

So is the real problem inequality?

It could be that very few countries have viable strategies to empower and elevate their massive low-income segments. The UK's recently announced budget will save the Treasury billions annually through cuts in welfare spending and housing credits, leaving the less-educated population outside of London to fend for itself in an increasingly devolved kingdom.

In America, real median income has been falling steadily since 2000, prompting prominent economists to argue for "helicopter drops" of direct cash transfers to boost the disposable income of the bottom 80% who make up the working poor and unemployed.

Even if it were feasible, how sustainable are such emergency measures?

Economic policy is not the place for utopian thinking. In arbitrating among calls for both lower taxes and greater redistribution, policy-makers need to get their orders of magnitude straight. Raising taxes in the U.S. on the 1% and closing offshore loopholes may bring in an annual windfall amounting to $150 billion according to the watchdog Public Interest Research Group.

By contrast, according to the "Digital Density Index" produced by Accenture and Oxford Economics, digitization of America's supply chains, procurement, research and other business functions could bring in $365 billion per year.

Furthermore, according to the 2013 book Endangering Prosperity by a pair of professors from Stanford and Harvard, raising American students PISA scores to the level of Germany would catapult incomes to $150,000 per capita in the coming decades. When it comes to inequality, amateurs talk about taxes; professionals talk about productivity.

So how have certain countries kept wages high and unemployment low?

Competitive high-wage economies such as Germany have world-class infrastructure coupled with strong public and private investment in non-tradable services such as healthcare and education.Matching training programs to market demand is how Germany, Switzerland, South Korea and Singapore have kept more people in work with larger pay packets.

A wide band of educational institutions ranging from universities to technical and vocational schools offer apprenticeships alongside courses and curricula are constantly modified to the latest technical standards.

Is it true that Germany has more billionaires per capita than America and lower inequality?

Yes, but it is a smaller country, with a highly skilled workforce and universal provision of quality education. It has social-democratic policies, but it focuses on equality of opportunity, not outcome.

What these economies also have in common is that small and medium-sized businesses are the backbone of the workforce. In the EU they represent 99% of all businesses and two-thirds of total private sector employment, and created 85% of new jobs in the past five years. SMEs are locally rooted, far less likely to outsource jobs en masse than publicly listed companies.

The U.S., by contrast, seems to be entering an age of economic individualism, with the number of self-employed, independent, or part-time "contingent" workers rising towards 40% of the working age population by 2020, according to software firm Intuit.

So what do Americans need?

Technology to connect and enable their mutual transactions. That is why the so-called "sharing economy'" (or peer-to-peer capitalism) is so crucial, for it creates new marketplaces in services that have not yet been replaced by algorithms. If Washington wants to help, it can build programs such as the UK government's "Slivers of Time" that matches people to jobs based on their skills, location, and time of day available, allowing shift workers to fill their schedules more profitably.

A 2014 paper by Kevin Murphy and Robert Topel of the University of Chicago points to how the skills gap accounts for most of the wealth gap. Higher degrees correlate to greater qualifications and substantially higher incomes. But with educational attainment slowing, especially among men, skills programs are needed for the masses that have missed the high-skilled speedboat.

That is why former Obama advisor Byron Auguste of McKinsey has just founded Opportunity@Work,a program focused on teaching technology and financial literacy to low-income people so that they can take entry-level positions in banks and start-ups. Its programs are underway in 21 communities where a total of 130,000 jobs are targeted to be filled from its ranks.

Such efforts are out to prove that technology and jobs don't have to be opposing forces. Indeed, they also allow education to become more do-it-yourself, with people fitting in online learning either between jobs or while unemployed.

Lynda.com, whose latest funding round propelled its valuation to more than $1 billion, has more than 2 million subscribers for its e-learning platforms that give access to over 80,000 instructional videos spanning sectors such as retail, construction and graphic design.

For all the stark contrasts in today's global cities, they remain the place where climbing the economic ladder is most feasible. According to a major study on economic mobility published in 2014 titled "Is America still the land of economic opportunity?" led by scholars including Emmanuel Saez of Berkeley and Raj Chetty of Harvard, despite two decades of overall stagnant prospects for appreciably raising incomes, cities such as San Francisco and Salt Lake City demonstrate European or Canadian levels of mobility because of good public schools and less urban sprawl, alongside other factors.

So, how does Singapore do it?

Singapore also ranks as one of the most unequal rich countries in the world, but with its nearly universal public housing scheme, wage ladders to designate decent salaries for low-skilled sectors such as construction and sanitation, and robust vocational education system focused on market-worthy skills, median household incomes rose by 17% annually between 2009 - 2014 even before it began more active redistribution policies in 2006 targeting the bottom 20%.

Being a city, state and island all in one certainly allows Singapore to focus on its densely jammed population, but the lessons of keeping housing costs down for families, wiring them all with fiber cable, and stretching virtually free rail and bus lines to every corner is a lesson all cities can learn from.

A 2014 study by NYU's Rudin Center for Transportation Policy and Management that analyzed 177 New York zip codes found that the highest median incomes correlated to proximity to public transport. The center's director Mitchell Moss declared, "It's far more important to have a MetroCard than a college degree."

Could we see trillionaires anytime soon?

The number of billionaires has doubled since the financial crisis to nearly two thousand individuals. Credit Suisse's 2014 World Wealth Report predicts that the first trillionaire could appear within two generations.

Will his or her impact on human society be beneficial or corrosive?

Chances are, whether their conglomerate is in tech, finance or other industry, they will create a lot of jobs and opportunities for people to improve their overall quality of life, even as he or she no doubt exacerbates wealth inequality. At that point, the real measure of success won't be whether statistical inequality has come down, but a far more utilitarian calculus of whether society has channelled global capital and technology to deliver opportunity as widely as possible. The evidence won't be in the Sandton, but in the rest of Gauteng.

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