AMERICAN.COM

Former chief economist of the Organization for Economic Cooperation and Development David Henderson coined the appellation, “Global Salvationism,” to describe the kind of behavior one witnesses at gatherings such as this past week’s World Economic Forum (WEF) in Davos, Switzerland. WEF was created in 1971 so that elites from around the world could gather to “map out solutions to global challenges,” according to WEF’s website. This year’s forum is entitled, “Improve the State of the World: Rethink, Redesign, Rebuild.” WEF’s program summary explains the urgency of the task facing those gathered in beautiful eastern Switzerland this way: “Improving the state of the world requires catalyzing global cooperation to address pressing challenges and future risks.” In an effort to compound jargon with alliteration, WEF uses “rethinking” in the titles of 29 conference sessions, “redesign” 16 times, and “rebuild” 9 times, for a total of nearly one-quarter of all the sessions. With all the turmoil created by the global recession and other “pressing challenges” in 2009, the world’s elites came together this week ready to re-do about everything.

Central to WEF’s annual objectives is what to do about life’s inequities and imbalances. Hardly anything warrants “catalyzing global cooperation” more than the ongoing effort to make poverty history, reduce inequality, and correct global imbalances. WEF has announced that global development is taking center stage on the third day of the event.

How ironic, then, that just prior to their gathering, Maxim Pinkovskiy and Xavier Sala-i-Martin updated findings from their 2009 National Bureau of Economic Research paper, “Parametric Estimations of the World Distribution of Income,” on the economics website VOX. Their findings show precipitous drops in global poverty since 1970—just about the same time WEF began meeting in Davos (Mark Perry wrote about the original paper here).

Between 1970 and 2006, the global poverty rate fell nearly 75 percent. During this period, the percentage of the world’s population living on less than a dollar a day fell from 26.8 to 5.4 percent. The world’s population grew 80 percent during the same period, which makes the poverty reduction all the more astounding. The global Gini coefficient, a standard measure of inequality, fell from 67.6 to 61.2 percent, indicating a drop in inequality as well as poverty. The same trend is found in other measures of inequality besides Gini.

And when one computes a measure of global “welfare” understood in the old-fashioned sense of well-being, we find that life has gotten better faster for a larger share of the world’s population than perhaps any time in history. By deriving a calculation of well-being from GDP and inequality measures, the authors show that between 1970 and 2006, global welfare more than doubled, growing faster than GDP.

The authors also consider the World Bank’s new purchasing power parity (PPP)–adjusted measures of GDP and find that while global poverty increases overall, the rate of poverty actually drops faster since 1970 than it does under more conventional GDP measures. In other words, under the PPP model, the world looks a lot poorer in 1970 than it does using more traditional measures of poverty, but today, the poverty rate is nearly the same regardless of whether one uses the PPP or more traditional measures (see the graph below). Using the World Bank’s adjustment actually has the effect of making it look like we have been doing a better job of reducing poverty over the past three decades, despite how the world looks poorer in any given year.

(Chart available at http://www.voxeu.org/index.php?q=node/4508.)

Now, just days before Pinkovskiy and Sala-i-Martin published their VOX article, Princeton’s Angus Deaton shot to pieces the idea that one can accurately measure global poverty and inequality across countries in his presidential address to the American Economic Association. Deaton’s argument is persuasive and serves as a good reminder that economic measures across different societies are nearly impossible to establish with perfection and complete accuracy. That said, it is interesting that Pinkovskiy and Sala-i-Martin find the same drops in poverty across the various methodologies they test. Something is going on here.

One might draw the conclusion that the precipitous drop in poverty corresponds with the beginning of the WEF meetings in 1971. Maybe the elite gathering has worked! Or, one might conclude liberalization of states and economies is working. During roughly the same period covered by the authors, the percentage of free countries in the world increased from 29 to 46 percent, according to Freedom House’s annual ratings. Liberalization and economic growth go together. One might also conclude that China’s explosive growth, which has carried Asia as a whole from 19 percent to 28 percent of the global economy during this period, has had a significant impact on poverty reduction, not to mention India’s rapid rise in its share of global GDP.

Instead of rethinking, redesigning, and rebuilding the world, WEF’s best minds might consider devoting a full day to understanding what worked the past forty years and figuring out how to “repeat” it.

Ryan Streeter is a senior fellow at the London-based Legatum Institute and can be followed on Twitter here.

Given the high drama of the ongoing healthcare debate and new fears about al Qaeda, it would be easy to have missed a triumph for liberty and prosperity this week south of the equator. On January 11, Chile became the first South American country to join the Organization for Economic Cooperation and Development (OECD). At first glance, I know it may not sound all that exciting that a Paris-based multilateral institution has welcomed Chile to its ranks, given everything else going on in the world. But with its accession to the OECD, which is effectively the club of the world’s 30 developed nations, Chile has laid down an important milestone for anyone who cares about growth and freedom. Why?

First, Chile was experimental like no other country when it comes to economic liberalization, and it has benefited as a result. The legendary “Chicago boys,” a group of 30 Chileans who studied under Milton Friedman at the University of Chicago, spent more than a decade in the 1970s and ’80s liberalizing trade, deregulating markets, de-politicizing the economy, and implementing a host of other free-market reforms. Given that these reforms occurred under General Augusto Pinochet, they have received some understandable criticism. Pinochet’s oppression and violence are well-known, and history has now judged him. Any attempt to implement sensible market reforms under a corrupt dictator is going to be messy and subject to grave abuse. However, given these obvious limitations, it is nevertheless hard not to argue that when Pinochet effectively handed over the economy to the Chicago boys, the seeds of Chile’s economic revival were sown. Chile’s resulting positive economic trajectory over the past several decades is a big part of why the OECD has admitted the nation. How ironic that while the OECD was busy admitting Chile to its ranks, Hugo Chavez devalued Venezuela’s currency by half.

Second, by 2004, Chile had returned to the top rating in the Freedom House’s index of political and civil liberties after its recovery from the long and dark years under Pinochet. Before its worst trials began a generation ago, Chile enjoyed a fairly durable democracy, which then went through a terrible trial. But the country recovered the best of its past and began running ahead of its neighbors. In the Legatum Institute’s Prosperity Index, Chile tops the list of South America’s largest countries (those with populations over 10 million), buoyed by its high scores in governance, safety, and security, and the contribution of its policies to economic growth. No other South American country has a higher governance ranking than Chile in the index. The lesson in all of this is that, together with its economic reforms, Chile has taken democratic governance seriously, creating an environment in which economic transactions are depoliticized, the rule of law is effective, and citizens are safe and free to choose their path.

Third, Chile stands as a clear reminder of the underpinnings of growth and progress to which many in the West have grown so accustomed that they may likely not recognize them anymore. As the United States engages with the likes of China, Iran, Russia, and Venezuela—all of which have grown more repressive this past year, as today’s Wall Street Journal astutely editorializes—policy makers would do well to look at Chile’s example. It stands as a case study of liberalization, something that America still stands for, even if the current administration’s tone on the issue has not been right. Engagement with unstable powers today needs to be littered with more, rather than fewer, references to liberalization, not only so that the OECD can welcome more members in the future, but because America’s security and continued prosperity are at stake.

Ryan Streeter is senior fellow at the London-based Legatum Institute and can be followed on Twitter here.

New Geography, the online magazine created by Joel Kotkin and others with a special focus on demographics and trends, has been tracking the implosion of California in an interesting way: by comparing it to Texas.

Texas and California are America’s two most populous states, together numbering approximately 55 million people, which is only about 6 million less than the United Kingdom, where I live. California, as everyone knows, has a coolness factor that Texas cannot match. Hollywood, Silicon Valley, and wine. Say no more. But, unless one has been living in a cave, everyone knows that the cool state is also the broke state. If Hollywood turned California’s budget and fiscal position into a movie, it would be a blockbuster horror film indeed.

Texas, on the other hand, is growing, creating wealth, and attracting the entrepreneurial and creative classes that too many people think only go to places like New York and California. This interesting post by Tory Gattis at New Geography explains why. He shares a four-point analysis from Trends magazine:

First, Texans on average believe in laissez-faire markets with an emphasis on individual responsibility. Since the ’80s, California’s policy-makers have favored central planning solutions and a reliance on a government social safety net. This unrelenting commitment to big government has led to a huge tax burden and triggered a mass exodus of jobs. The Trends Editors examined the resulting migration in “Voting with Our Feet,” in the April 2008 issue of Trends.

Second, Californians have largely treated environmentalism as a “religious sacrament” rather than as one component among many in maximizing people’s quality of life. As we explained in “The Road Ahead for Housing,” in the June 2009 issue of Trends, environmentally-based land-use restriction centered in California played a huge role in inflating the recent housing bubble. Similarly, an unwillingness to manage ecology proactively for man’s benefit has been behind the recent epidemic of wildfires.

Third, California has placed “ethnic diversity” above “assimilation,” while Texas has done the opposite. “Identity politics” has created psychological ghettos that have prevented many of California’s diverse ethnic groups and subcultures from integrating fully into the mainstream. Texas, on the other hand, has proactively encouraged all the state’s residents to join the mainstream.

Fourth, beyond taxes, diversity, and the environment, Texas has focused on streamlining the regulatory and litigation burden on its residents. Meanwhile, California’s government has attempted to use regulation and litigation to transfer wealth from its creators to various special-interest constituencies.

I wrote an article for New Geography related to the second point last spring. The role played by housing regulations in the housing bubble is one of the most under-reported and under-analyzed factors contributing to the 2008 financial crisis, and nowhere was its destructive force more evident than in California. Regulators lathered on rule after rule to construction requirements, escalating costs so dramatically that lenders had to design “exotic” mortgages so even relatively affluent people could afford homes. One of Texas’s attractions, meanwhile, was the opportunity of much more affordable homeownership.

Perhaps the analysis above falls a bit short, though, in not giving enough attention to role that the tax structure in California has played in driving people away, and the parallel problem of the state’s hemorrhaging public sector workforce. Kotkin has written in Forbes that California’s government workforce has saddled the state’s budget with $200 billion in unfunded pension liabilities. Kotkin also points out that California has been losing high-tech jobs to the Southwest and elsewhere because of its increasingly hostile tax and regulatory environment.

By now, the subtext of this post should be clear: the Obama administration is behaving as though California were its model for growth. Increasing unfunded liabilities, proposing $1 trillion in new healthcare spending, responding to the economic crisis with new regulatory agencies but balking on the core causes of the problem—all of this and more betrays a sinister psychology of policy making.

Like California, the Obama team and their congressional allies seem to think that entrepreneurs and business leaders will simply sit there and take it, doing their “civic duty” by paying new direct and indirect taxes, and complying like obsequious puppies with new regulatory requirements. California provides pretty good evidence that this type of “civic duty” wears thin. The best and the brightest won’t just sit there and take it. We are already seeing this in the UK, where entrepreneurs and the job-creating class are leaving (witness this rather enjoyable account of the situation by London’s mayor, Boris Johnson).

“Texas vs. California”—hardly any phrase more succinctly captures the battle going on today for America’s philosophical soul.

Ryan Streeter is a senior fellow at the London-based Legatum Institute and can be followed on Twitter here.