The end of poverty?
One finance expert argues the world is indeed getting richer and that the path to prosperity is clear
John Edmunds has seen the future and it's wealthy.Skip to next paragraph
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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.