Using the new method, the authors examined poverty rates in four Indian provinces and evaluated the approach in comparison to the existing income method which had been used in economic and policy analysis by the World Bank and other institutions of economic development. The authors found a significant divergence of poverty rates when measured in both methods. For instance, under Alkire-Foster approach, the poverty rate in Indian state Jharkhand is 50 percent higher compared to the rate of poverty measured under the income method. On the other hand, the authors of the new poverty measure have shown that in some Indian provinces such as Uttaranchal (link), the official measure of poverty highly over-estimates the effective poverty measure as defined by Oxford’s Poverty and Human Development Initiative. The multidimensional worldwide poverty index is also availible on the web (link).

The intuitive question arising from the data and empirical research on poverty is whether higher economic growth in less developed countries boosts the growth of income per capita and what is the role of institutional characteristics in economic development. The authors of the above-mentioned measure of poverty have shown that despite abundant economic growth in past years and falling income poverty rates, the share of population without access to clean water, sanitation and minimum required nutrition remained unchanged. The percentage of malnourished children in India decreased from 47 percent in 1998-98 to 46 percent 2005-06.

The theoretical and empirical literature on economic growth suggests that there is an inverse U-relationship between inequality and income per capita known as Kuznets curve (link). The intuition behind the relationship is simple. At the very low levels of income per capita, income inequality is low. Alongside the course of growing income per capita, income inequality steeply increases and, after reaching a maximum, it decreases as countries achieve higher levels of income per capita. The rate of income inequality is closely related to the evolution of economic policies over time. Wagner’s law, discussed in one of the previous posts, states that government spending over time increases due to long-run income elastic demand for public goods and capture of the democratic system by the particular interest groups that pose a permanent pressure on the growth of government spending and resist the reversals of government expenditures by trading votes.

There’s a wide array of disagreement among economists on the effect of income inequality on economic growth. Back in 2001, Joseph Stiglitz re-examined the East Asian economic miracle and concluded that the evidence from the period of high economic growth in East Asian countries suggests that income redistribution has a positive effect on economic growth (link). Stiglitz’s argument is based on the income distribution in East Asian countries during the economic miracle. East Asian countries have been known for relatively even distribution of income demonstrated by high Gini index and relatively high income tax rates.

On the other hand, the empirical investigation of the initial conditions in East Asian countries before the economic miracle shows that the political influence of interest groups had been relatively weak compared to Western Europe after the World War 2 when the productivity growth stalled from early 1970s onwards. The relative weakness of interest groups and a stable judicial system, inherited from English common law tradition, enabled high economic growth in the longer run given an enduring stability of property rights protection and the rule of law. In such conditions, income redistribution had relatively little effect on economic growth since the empirics of East Asian miracle suggests that the sizable proportion of growth in East Asian countries (Malaysia, Singapore, Korea and Taiwan) had been driven by technological progress, investment and export orientation. Considering export orientation, Rodrik et. al (2005) provided the evidence (link) on the positive effect of high-quality export orientation on economic growth. The productivity growth in East Asian countries between 1975 and 1990 had been a pure example of economic miracle defined by the share of growth that could not be explained by the contribution of labor and capital input. In Taiwan and Hong Kong (link), total factor productivity accounted for about 60 percent of output per capita growth. Between 1975 and 1990, in Singapore, output per capita had increased by 8.0 percent. Consequently, the resulting outcome of almost two decades of robust productivity growth had been a significant decrease in national poverty rates (link). The lowest poverty rate, as defined by the measures of home authorities, is in Taiwan where 0.95 of the population live below the poverty threshold.

The basic set of policies that alleviate extreme poverty such as providing access to clean water, nutrition, medical protection against HIV/AIDS and basic sanitary standards have a positive effect on the economic growth and the standard of living. However, the major cause of persistent under-development in Subsaharan and Tropical Africa is mostly the lack of institutional enforcement of property rights, the rule of law and independent judiciary. In spite of billions of USD of direct foreign aid, countries such as Zambia, Sierra Leone, Mali and Rwanda endure in persistent poverty and under-development. Esther Duflo, this year’s recipient of John Bates Clark Award, has shown in several studies how field experiments can enlighten the understanding of incentives in least developed countries (link). Understanding the significance of incentives in reducing poverty is crucial to further examination of the relationship betwen income inequality and economic growth.

Sharp declines in housing and stock markets, new lifestyle choices being made because of commodities and luxury prices coupled with unprecedented access to consumer credit and corporate capital, have it seems brought about a significant shift not only in what is meant by rich and poor, but also in every intermediary position on the spectrum.

What distinguishes the relationship between poverty and affluence today from those more recent and distant past? The new, evermore challenging senses of these two old states can be illustrated by their experiential dissociation both from their precedents and each other on the three interrelated levels put forth above. On individual or family scales as on the others, being rich or poor is no longer tantamount with feeling rich or poor — until it’s too late.

The thick black line creating the age-old dichotomy between rich and poor has, in the popular and academic imagination alike, been drawn between them in this way: First are the “haves” who possess the means, knowledge and connections to survive or thrive in nearly any given economic environment. Second are the “have-nots” who sometimes even in the most prosperous conditions find it difficult or impossible to survive due to lack of such resources, let alone thrive. Of course, we are far from in prosperous conditions now, which in theory should only accentuate, rather than revolutionize, the situations of haves and have-nots.

The French Revolution (1789), pitting rural peasants and urban poor against their well-to-do overlords, graphically exemplifies the differences and disasters the absoluteness of having and not having can cause when exacerbated by unusually difficult conditions and/or radical mindsets. Likewise, To Have and Have Not, Ernest Hemingway’s lackluster 1937 novel set during the Great Depression, dramatizes these differences by narrating the slippery slope slide of its main character from fearless fisherman to human trafficker as he and his family increasingly finds it difficult to make ends meet. Having or not having thus become ethical and/or moral in addition to socio-economic positions and problems. What of buying and not buying?

Having or not having as the defining, dividing line between poor and rich has recently been displaced by the power to buy or not to buy in developed economies such as that of the U.S. The key difference is that having depends upon resources that are already one’s own as means of subsistence and prosperity; on the contrary, buying can depend on resources that are borrowed or devalued and be either a means of further enrichment or a road to further destitution. Terrorist economies such as that of the present, whose perpetrators ought to be so charged, paradoxically expose this distortion and make it less visible by bringing much wider trends closer to home.

For example, according to the old paradigm of poverty and affluence, have-nots became rich by coming to have (that is, own in full) what they did not before: properties, luxuries, cash, investments, lifestyles, etc. Within the new economics of poverty and affluence, however, it is precisely by being able to buy what the poor and moderately affluent alike did not have before that they can become even poorer. The culprits, credit cards, store financing, lines of credit, first through third mortgages and other forms of consumer credit have turned have-nots into buyers, making them poorer in the process. But the same does not go for the haves.

In contrast, within the old paradigm the affluent could use what they have to survive even the severest recessions, whereas now those who can leverage their holdings can go so far as to increase their wealth during such periods by buying more for less than they could have in more prosperous circumstances. Foreclosures are traumatic events in the life of struggling families, but for indifferent investor they are wellsprings of profit. This is not to say that an ethical problem is poised on the part of such investors; rather, it arises with the original lenders to the families who enabled them to become buyers despite being have-nots.

In the past, loan sharks used to break your legs if you failed to pay a loan. Now, lenders have broken their own legs to lend you money, are running to the government for crutches, but both institutions are still expecting you to pay their medical bills. For those who have and have-not, the concepts and experiences of poverty and affluence are directly correlated; for those who buy and buy-not, they are inversely correlated, as illustrated in the following graph:

As the buying power of the poor goes up, their actual wealth goes down. As the buying power of the rich goes down, their actual wealth goes up. Credit crises like the current one or that of 1999 are in this way both corrections and continuations of a problem: the poor realize just how poor they have become (the correction) and the rich realize they have a rare opportunity to get richer even quicker, often at the expense of the poor (the continuation). Of course, these traits are to some extent perennial in socio-economic history, but recent and drastic augmentations in purchasing power and the cost of certain goods make it clear that their dimensions and degrees have been significantly intensified.

At the heart of the mortgage crisis was that lenders like banks, relishing in a criminal lack of regulation maintained in the name of free markets, turned have-nots and modest haves into nightmarish homebuyers in the name of the American Dream. To paraphrase an instigator of the French Revolution, Jean-Jacques Rousseau, markets are born free but are everywhere in chains — and it’s a good thing too, as our current crisis makes painfully clear. Another metaphor must now be added to that of “card houses:” paper mortgages. The buyers who suffer, and haves who profit, most from the mortgage crises are quite literally living in it.  In the immediate present, the choice between buying groceries or a new computer doesn’t have to be made because, thanks to consumer credit, both can be done right now. But because of this very situation, it is those who buy not who end up being those who have, while those who buy end up being those who have not. Retailers, desperate for sales, have begun slashing the prices of luxury goods: good news for the haves, bad for the buyers, even if the latter may think otherwise for the time being. More so than in decades, it is possible to live it up by buying it down, and vice versa. The crown jewels of global markets, American consumers, have begun to lose their half-century long luring shine; whether they were faux to begin with has yet to be definitively determined, though the magnitude of our depression-in-denial is an indication.

Consumer credit, originally used to facilitate transactions on a temporary or emergency basis, has in becoming available on standing and widespread basis allowed the poor to drift into an imagined affluence and the affluent to drift into actual poverty. Stagflation, once seen as rather rare and precarious, can be seen as the norm in contrast to which economic growth and inflation are exceptions. If mortgages are the first thing people can’t afford, then their credit card and student loans may be tied for second with their gas tanks. To stress the point: being able to buy more by access to consumer credit only artificially stimulates the economy and in actuality make consumers poorer precisely because they have more. What Karl Marx called false class consciousness has become a false class conscience.

The proposed newest round of “economic stimulus” packages may be fueling, rather than extinguishing, the financial fires burning up retirement and college savings, home equity, and physical and mental wellbeing. As the Associated Press reported:

The Fed program for consumer debt will lend up to $200 billion to the holders of securities backed by various types of consumer loans such as credit cards, auto and student loans. The goal is to provide greater demand for these securities as a way of lowering interest rates consumers are paying and to make these loans more available.

“Rich in debt” sounds like a paradox because it is one, but it accurately describes the basis upon which more and more people, corporations and governments make their daily and momentous decisions, which a passing thought about posterity would prohibit.

Combined with the checks by which the government is effectively giving out the taxes our children’s children will pay, such stimuli, although welcome on individual levels, accentuate rather than abate the social incongruities of poverty and affluence in two ways. First by giving some poorer people an artificial, short-term spending spree or debt reduction which allows them to continue buying patterns they may not have been able to afford to begin with. Second: by enabling some richer people to sustain their real or imagined wealth a little longer and/or to increase it in the long-run by purchasing discounted securities and property. The point is that the very pitfalls people are waking up to find themselves in today, corporations and governments are rushing into as if the practice of usury was a step towards paradise.

Antony Adolf, author of *Peace: A World History*, is an independent scholar and creative writer. His blog, “One World, Many Peaces,” is at http://oneworldmanypeaces.typepad.com/.