The end of poverty?
One finance expert argues the world is indeed getting richer and that the path to prosperity is clear
WELLESLEY, MASS. — John Edmunds has seen the future and it's wealthy.
This will be news to many certainly to all those antiglobalization protesters who now force the world's economic leaders into retreat behind concrete wherever they gather. And many people are used to thinking of the developing world only in terms of dire, and worsening, poverty.
But Dr. Edmunds, a professor at Babson College in Wellesley, Mass., is adamant. "The economic problem is now solved," he says. "For thousands of years, mankind struggled to achieve freedom from poverty. The solution is now here and is rapidly transforming everyone's economic possibilities everywhere."
It may be true that global wealth creation continues apace. But some warn that the rich are getting richer, and the poor poorer, at rates that surprise even pessimists. A recent World Bank study, for instance, found the gap between rich and poor "absolutely huge and far higher than conventional measures indicate."
Yet statistics also show millions escaping poverty. (See www.developmentgoals.org, a World Bank website.) And someone out there is buying all those cellphones and TVs and computers being sold in the developing world (see chart, right).
Edmunds, a finance expert whose next book is tentatively titled "Brave New Wealthy World," argues that the world as a whole is indeed getting richer. Financial wealth stocks, bonds, and other "paper" assets increased 11 percent annually through the 1980s and '90s, and continues at a similar clip today despite the "Asian flu," the dotcom bust, and the Enron debacle.
Admittedly, most of this benefits primarily the nations that are already rich. Edmunds insists, though, that developing countries could follow the same path to prosperity.
He seems a little overwhelmed at times by the implications of his own research. He didn't set out to prove the end of poverty. "I have the tendency to follow a numerical argument wherever it takes me," he says. "If the lines cross, they cross."
His recipe for global prosperity? In simplest terms: Develop financial markets, especially stock markets. Make it easier for the masses to buy shares rather than stash cash in a mattress.
Edmunds is quick to admit how fragile the globe's accumulated financial assets are. "It's a five-story house of cards, and I'm advocating adding a sixth and a seventh level."
Perhaps because of that, not everyone is sanguine about this approach. Jeffrey Frankel, a specialist in international capital markets at Harvard University's Kennedy School of Government, says, "I would warn against seeing stock markets as a panacea," he says.
Edmunds's recipe for wealth includes encouraging privately held companies to go public, and conglomerates to spin off subsidiaries to give the public as many different places to invest as possible. Indeed, he sees issuing high-quality securities for investors as one of a corporation's main responsibilities.
He also urges governments to develop the laws needed for novices, foreigners, and other outsiders to invest confidently.
A lot of what Edmunds advocates is already happening, at least in the developed world. He derives his estimate of 11 percent growthfrom statistics he has painstakingly collected from sources such as the Bank for International Settlements in Switzerland, the International Monetary Fund, and the Organization for Economic Cooperation and Development.
Eleven percent growth minus 2 percent for inflation, as he calculates, leaves 9 percent growth in "real" terms. That means, among other things, increased demand for labor: People with more money will want to spend it, on everything from hairdressers and personal trainers to new cars and computers. This will create jobs, at home and abroad. Workers should benefit, as well as investors.
Edmunds describes a historic shift in investment patterns. Since the early 1980s, millions have shown themselves more willing than their grandparents to buy stocks, bonds, and mutual funds, instead of real estate and other physical assets.
This is especially true in the United States, but elsewhere, too. An Indonesian government official, for instance, taking a Starbucks break from a recent conference at Harvard University, says, "In Jakarta, even the housewives are in the stock market. They get the children off to school, and then go buy and sell shares."
This matters for global prosperity, Edmunds says, because rising share prices raise the value of productive assets such as factories and intellectual property.
If enough people buy shares of a certain company, its share price will go up, and it will be able to borrow against that higher price to finance expansion. What goes up can also go down, Edmunds agrees but it never quite goes all the way back down.
To some observers, though, Edmunds's proposals may be a bit too idealistic.
Harvard's Mr. Frankel says he agrees "with the thrust of them." But, he adds, as an engine of prosperity, free movement of capital doesn't have quite the same track record in boosting prosperity as does the free flow of goods and services.
An essential element of the wealthy-world scenario is "regulatory transparency" rules that ensure fair treatment of all investors, local and foreign. But, Frankel warns, "It's fine to say you're going to have protection in place for investors, but it's not so easily done."
The view of Didier Jacobs, a researcher for Oxfam International in Boston, is less nuanced. He is the author of a forthcoming report, "Global Finance Hurts the Poor." He worries about the volatility of capital flows: international investors pouring money into one country and then sucking it back out when opportunity beckons elsewhere. This is what happened in Asia in the late 1990s, when foreign investors bolted after the collapse of the Thai currency, the baht.
Mr. Jacobs likens capital flows to a river running into a lake. "If you're a big lake, the river doesn't matter. But if you're a small lake, you can be flooded or left dry," depending on the vagaries of the river. Developing countries, he says, "shouldn't cut themselves off from foreign investment but shouldn't follow blindly after it, either."
On the walls of his office on Babson's white-pillared campus, Edmunds's mustachioed face beams out from clippings of articles about him in the Latin American press, testament to his many years of living and working there.
He is clearly nervous about how his findings will be interpreted. He doesn't want to sound glib about the sufferings of the poor.
"I not only acknowledge the plight of these people but have spent a lot of my adult life trying to do something about it. And progress is being made."
One area he targets is one closely linked to poverty: population. Edmunds predicts labor shortages will crop up throughout the Americas and on the Eurasian landmass. Birthrates have been falling significantly around the world, even in developing countries. And some time in the next several decades, the global population curve on an upward slope throughout history will reverse itself and head gradually, gracefully downward.
More wealth plus fewer people equals labor shortages, which should translate eventually into economic opportunity, even for the planet's poor.
"I don't mean that someone in the highlands of Papua New Guinea is going to get a job next week," Edmunds says, "but by 2040, they would be pulled into the money economy by the process I'm describing."
Many researchers focusing on population issues, however, do not warm to the notion of a labor shortage, or any suggestion that the "population crisis" is under control.
And the new financial wealth will be "wildly unevenly distributed," Edmunds acknowledges. He warns, "It's going to be a richer world, but not necessarily a prettier one. A rising tide does not necessarily lift all boats."
Earlier this year, Branko Milanovic, a World Bank economist, released a study showing that the world's richest 1 percent receive as much income as the bottom 57 percent. "Inequality has dramatically increased," he says.
He found that someone receiving the average income for the bottom tenth of the United States population would be better off, by the numbers anyway, than two-thirds of the world's population.
The study shows "the widening of the income distribution," Mr. Milanovic says. "The middle is being sort of emptied out."
Latin America, for instance, experienced two decades of no growth, and in much of Eastern Europe, economic progress has not matched political progress.
But some of the poorer countries are working their way up into middle-class status notably the Asian tigers such as Singapore, Malaysia, and Thailand.
These countries have achieved their success, says Richard Cincotta, director of research at Population Action International, by pushing hard to make education and family planning available to their people, and by being clear about what industries they wanted.
"They wanted technology, not T-shirts," he says.
This kind of industrialization is made possible by the development of financial markets, as Edmunds recommends. But is he a voice crying in the wilderness of Wellesley Hills?
"People tell me, 'You're promoting a Ponzi scheme,' " he says, and he acknowledges that in a sense, he is. "But even if it is a bubble, you can let the air out of a bubble slowly....
"A bubble that takes 30 years to expand: I call that growth."