Wednesday, August 24, 2011
Latin American Inequality
The UN's Slums of the World report notes that income inequality, as measured by the GINI coefficient, is extremely high in Latin and South America. It notes that this index is growing fast in the largest economies in this region: Argentina, Mexico, and Brazil. I would like to use this post to discuss the GINI coefficient in general.
The GINI coefficient (for income distribution) is used to measure what percentage of income is controlled by what percentage of the population in a given country. The coefficient will be a low number if income in a country is spread out, while the GINI will be high if a high proportion of the income is concentrated in a low proportion of the population. Prevalently, a low GINI coefficient is considered a good thing, while a high GINI is considered bad. However, this is somewhat misleading because in a country where everyone is poor there will be a low GINI index, and the as soon as some people start to earn higher incomes the index will increase. In other words, an increasing GINI index could be a result of economic growth.
Us economists are always talking about incentives. In a society where all of the people earn exactly the same income, there will be little incentive to be innovative, industrious, etc., because people will not believe it will be possibly to make a much greater income than others. However, in an society where people are rewarded for things like innovation and industry with higher incomes, the people will have incentives to be innovative and industrious, and also take more entrepreneurial risks, which are all essential for healthy economic growth.
Besides, if perfect income equality is the goal, it is easy to achieve. We all need only stop working and wait until all of our incomes are zero.
The GINI coefficient (for income distribution) is used to measure what percentage of income is controlled by what percentage of the population in a given country. The coefficient will be a low number if income in a country is spread out, while the GINI will be high if a high proportion of the income is concentrated in a low proportion of the population. Prevalently, a low GINI coefficient is considered a good thing, while a high GINI is considered bad. However, this is somewhat misleading because in a country where everyone is poor there will be a low GINI index, and the as soon as some people start to earn higher incomes the index will increase. In other words, an increasing GINI index could be a result of economic growth.
Us economists are always talking about incentives. In a society where all of the people earn exactly the same income, there will be little incentive to be innovative, industrious, etc., because people will not believe it will be possibly to make a much greater income than others. However, in an society where people are rewarded for things like innovation and industry with higher incomes, the people will have incentives to be innovative and industrious, and also take more entrepreneurial risks, which are all essential for healthy economic growth.
Besides, if perfect income equality is the goal, it is easy to achieve. We all need only stop working and wait until all of our incomes are zero.
Thursday, August 18, 2011
Adam Smith Quote #1
"The great source of both the misery and disorders of human life, seems to arise from over-rating the difference between one permanent situation and another."
- Adam Smith, The Theory of Moral Sentiments
Reading about slums I am finding that Smith's idea seems to be true in the case of the "permanent situation" of an individual not living in an informal settlement, as compared with that of a slum-dweller. When we view the life of someone living in a slum we imagine ourselves in such a situation, but someone who has grown used to living in a slum has a completely different view of their own situation. It is a form of ethnocentrism. I would like to emphasize that I am not attempting to downplay the impoverishment in the slums. I am pointing out that there is no common denominator with which to compare the slum-dwellers view of the slum with that of the non-slum-dweller. This is important because many policies are based on the view of the latter.
Government & Slums #1
Too often government policy is proposed as a possible "cure" for the impoverishment that is rampant in the slums of the world. The UN's Slums of the World claims that "lack of clear pro-poor policies" is one factor that ha led to "dramatic growth of poverty in Africa." One problem with this claim is that the causes of poverty are quite uncertain, so "clear pro-poor policies" would be extremely difficult to enact. The UN's report names bad governance and slow economic growth as the other two primary factors in the growth of poverty in Africa, which are much more reasonable , especially the former, which might also be contributing to the slow growth.
The report goes on to point out that "in some urban centres, the inhabitants have virtually lost faith in the ability of municipal and city governments to provide them with a clean, efficient, safe and affordable environment to live." The problem is that the report implies this is a bad thing, when in fact it will most likely lead to improved conditions in the slums. This is because if the individuals living in these settlements truly value a "clean, efficient, safe and affordable environment to live," then they will begin to take actions on there own to create such an environment, now that they expect the local government to sit on the sideline. Unless of course they expect the government to evict them or destroy the slum, these expectations would lead to inaction because the residents would see any improvements as short-lived.
The report goes on to point out that "in some urban centres, the inhabitants have virtually lost faith in the ability of municipal and city governments to provide them with a clean, efficient, safe and affordable environment to live." The problem is that the report implies this is a bad thing, when in fact it will most likely lead to improved conditions in the slums. This is because if the individuals living in these settlements truly value a "clean, efficient, safe and affordable environment to live," then they will begin to take actions on there own to create such an environment, now that they expect the local government to sit on the sideline. Unless of course they expect the government to evict them or destroy the slum, these expectations would lead to inaction because the residents would see any improvements as short-lived.
Friday, August 12, 2011
Another ridiculous statement form the UN REPORT
The following quote is from the UN's 2003 report Slums of the World.
The poor do not automatically benefit from good "macroeconomic statistics", compared with the non-poor, particularly in terms of the corresponding improvements in the quality and coverage of public services.
I suppose it is true that the poor do not benefit from macroeconomic statistics, unless they are doing research of course. However, the poor, as a group, do necessarily benefit from increased production in the society for many reasons and increased production in the society is a macroeconomic variable. Holding other variables constant, increased production will lead to lower prices, which is clearly good for the poor. Further, increased production, in the vast majority of cases, leads to increased employment.
The second part of the statement implies that increases in quantity and quality of public services that result from economic growth help the non-poor disproportionately. This is most likely no the case, as the more income someone earns, the more likely it is that they can afford substitutes to public services. Also, even if the services help the non-poor more, this does not imply that the poor do not benefit. Lastly, many (free-market) economists will argue that most people are worse off as a result of public services due to the opportunity cost associated with such services.
The poor do not automatically benefit from good "macroeconomic statistics", compared with the non-poor, particularly in terms of the corresponding improvements in the quality and coverage of public services.
I suppose it is true that the poor do not benefit from macroeconomic statistics, unless they are doing research of course. However, the poor, as a group, do necessarily benefit from increased production in the society for many reasons and increased production in the society is a macroeconomic variable. Holding other variables constant, increased production will lead to lower prices, which is clearly good for the poor. Further, increased production, in the vast majority of cases, leads to increased employment.
The second part of the statement implies that increases in quantity and quality of public services that result from economic growth help the non-poor disproportionately. This is most likely no the case, as the more income someone earns, the more likely it is that they can afford substitutes to public services. Also, even if the services help the non-poor more, this does not imply that the poor do not benefit. Lastly, many (free-market) economists will argue that most people are worse off as a result of public services due to the opportunity cost associated with such services.
Tuesday, August 9, 2011
Welfare Expenditures and Slums
The following quote appears in the UN's 2003 report, Slums of World.
There is evidence over the last decades, some nations have raised public expenditures on social and basic services as a percentage of Gross Domestic Product (GDP), which suggests there might be an improvement on slum conditions.
Do increases in welfare expenditures necessarily help the people living in slums? I would argue no. Here are some reasons:
There is evidence over the last decades, some nations have raised public expenditures on social and basic services as a percentage of Gross Domestic Product (GDP), which suggests there might be an improvement on slum conditions.
Do increases in welfare expenditures necessarily help the people living in slums? I would argue no. Here are some reasons:
- The money may never make it to the slums (in any form).
- The money may be spent on services that the slum dwellers do not want or need.
- If the conditions in the slum do indeed improve in the short-run, then more people will flock to the slum, and there will be more over-crowding, possibly leading to even worse conditions.
I am not arguing that these expenditures definitely will not improve conditions for individuals living in slums. I merely am pointing out that it should not be assumed that these expenditures will definitely improve conditions. Such an assumption could lead to very poor policy making decisions. Imagine a scenario in which the slum is growing as a result of the government providing services to the slum. This would lead to a higher cost of the services, and we have entered a spiral of increasing costs.
Monday, August 8, 2011
Access to Water
Some statistics from the UN's Slums of the World:
- In 2001 there were 168 million "urban dwellers" without "improved provision for water" in the developing world.
- 44.6 million in Africa.
- 28.7 million in Latin America.
- 93.5 million in Asia.
The report goes on to say that "the number of urban dwellers inadequately served would be much higher - perhaps as much as four times." Of course the report does not go on to define "inadequately served." The reason that I point out the ambiguity in some of these definitions is to reiterate the fact that this report is attempting to aggregate a phenomenon where it is impossible to do so.
Let me offer a casual definition of slum. A slum is a place where people who have, or whose parents or grandparents had, arrived and gathered in order to find there place in a rapidly changing economy. In most cases these people have arrived from rural areas where life is very bad. In fact, life must be worse in those rural areas than in the poor urban areas, because this is why people seemingly flock to these informal settlements. The important thing here is that when we define slum we are not defining a geographical location, or a particular set of amenities like "improved access to water", what we are defining is a group of people and their actions.
UN's definition of a slum dweller.
In the first of the reports that I mentioned in my last post, the definition of a slum dweller is given as an individual who lives in a "slum household." Then a slum household is defined as a group of individuals living under one roof lacking at least one of the following:
- Access to improved water.
- Access to improved sanitation facilities.
- Sufficient living area, not overcrowded.
- Structural quality/durability of dwellings.
- Security of tenure.
At least none of these conditions are ambiguous, NOT! Improved water, compared to what? Improved sanitation facilities, compared to what? Sufficient living area? Structural quality/durability? Security of tenure? Clearly, this definition is not sufficient. In fact, in my opinion the heterogeneity of what are known as "slums" around the world makes it impossible to give a solid definition of what they are. The definition above represents a vain attempt to aggregate a phenomenon that cannot be aggregated, a common mistake in the social sciences.
Sunday, August 7, 2011
UN Studies
The United Nations came out with two comprehensive studies about the "slums" of the world in 2003:
- Slums of the World: The face of urban poverty in the new millennium?
- The Challenge of Slums: Global report on human settlements.
The first is essentially just a progress report on the second, and explains the empirical methods used in the second. I will spend my next several posts discussing these reports from an economic perspective. The reports are connected to what are known as The Millennium Development Goals.
Saturday, August 6, 2011
Largest Slums by Population in 2005
The following informal urban slums had populations of over 1 million in 2005 (the list has definitely grown significantly since then):
- Neza/Chalco/Izta, Mexico City, Mexico. 4 million inhabitants.
- Libertador, Caracas, Venezuela. 2.2 million inhabitants.
- El Sur/Ciudad Bolivar, Bogota, Columbia. 2 million inhabitants.
- San Juan de Luringancho, Lima, Peru. 1.5 million inhabitants.
- Cono Sur, Lima, Peru. 1.5 million inhabitants.
- Ajegunle, Lagos, Nigeria. 1.5 million inhabitants.
- Sadr City, Baghdad, Iraq. 1.5 million inhabitants.
- Soweto, Guateng, South Africa. 1.5 million inhabitants.
- Gaza, Palestine. 1.3 million inhabitants.
- Orangi Township, Karachi, Pakistan. 1.2 million inhabitants.
- Cape Flats, Cape Town, South Africa. 1.2 million inhabitants.
- Pikine, Dakar, Senegal. 1 million inhabitants.
- Imbaba, Cairo, Egypt. 1 million inhabitants.
- Ezbet el-Haggana. 1million inhabitants.
It is important to point out that the conditions in several of the slums may have changed significantly since 2005. Slums and shanty towns are constantly changing for many reasons. Governments have be known to burn slum areas and to evict people, while in some cases (however rare) governments have attempted to improve conditions in slums. The most successful way to improve conditions in slums is essentially to give the people living in the slums incentives to try to improve the conditions in which they live on there own.
All actors in any society will attempt to improve the conditions in which they live. This is the nature of human action. This fact is no different amongst people living in slums. If people living in slums believe that the local government intends to evict them or burn them out, then they will have very little incentive to invest in the production of capital goods that do not allow for immediate consumption. For example, a man living in a slum might want to add plumbing to his residence. This is an undertaking that would require planning and several stages of production before the plumbing could ever actually be enjoyed. If the man believes that there is a high probability that he will be evicted, or his house will be destroyed, then he will be much less likely to invest in such a production process.
For a detailed discussion on the influence of expectations of government action on individuals behavior see:
Storr, Virgil and Chamlee-Wright, Emily. "Expectations of government's response to disaster ." Public Choice, 144 (1-2) 2010.
Friday, August 5, 2011
Welcome!
As can be seen from the chart below, the number of people living in urban areas has been increasing steadily over the last several decades.
(Source: UN World Urbanization Prospects: The 2009 Revision)
This growth has and will continue to be accompanied by the growth of Informal Settlements, or Urban Slums. Many estimate that the number of people living in Slums will reach 2 billion by about 2030 (Eaves, Elisabeth. 2007. Two Billion Slum Dwellers. forbes.com).
Never before in history have so many lived in such close quarters, especially in settlements that are widely considered illegal by the surrounding community. In this blog I intend to discuss the economics of slums. I will focus on the economic behavior of those who live within slums and the institutional arrangements that arise from such behavior. Also, I will often discuss the interaction between the slums and the surrounding communities. Especially, local governments (mostly futile) attempts to eradicate the informal settlements, or at least to exercise some sort of authority over the slum-dwellers.
I welcome any comments and insights from readers on future posts and hope that this blog creates a center for economic discussion and debate about slums.
(Source: UN World Urbanization Prospects: The 2009 Revision)
This growth has and will continue to be accompanied by the growth of Informal Settlements, or Urban Slums. Many estimate that the number of people living in Slums will reach 2 billion by about 2030 (Eaves, Elisabeth. 2007. Two Billion Slum Dwellers. forbes.com).
Never before in history have so many lived in such close quarters, especially in settlements that are widely considered illegal by the surrounding community. In this blog I intend to discuss the economics of slums. I will focus on the economic behavior of those who live within slums and the institutional arrangements that arise from such behavior. Also, I will often discuss the interaction between the slums and the surrounding communities. Especially, local governments (mostly futile) attempts to eradicate the informal settlements, or at least to exercise some sort of authority over the slum-dwellers.
I welcome any comments and insights from readers on future posts and hope that this blog creates a center for economic discussion and debate about slums.
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