Economics Index and Qualifications
By Richard Bruce BA, MA, and PhC in Economics
Former Instructor St. John's University, New York City

The proportion of humanity in low income nations dropped by about 80% in 12 years, between 1998 and 2010

In 1998 about 60 percent of the world's population was living in low income countries. In 2010, twelve years later, that percentage was reduced to less than 12 percent. This was an 80% reduction in only 12 years. Living in a low income country was normal for the human race in 1998, by 2010 it had become the exception.

China, India, Pakistan, Nigeria, and Vietnam had all moved up from low to middle income. So five of the six most populous low income countries in 1998 were middle income countries in 2010. The only one that did not make it was Bangladesh.

If you are wondering why globalism is good, this should give you a clue. Globalization is rapidly emptying the low income category and that trend will probably continue.

Income Distribution

Of course there is still the problem of income distribution within the poor countries, but now these poor countries have some income to distribute.

Furthermore, the redistribution has begun. It has been reported (I believe in 2010) that there have been strikes and/or large increases in pay, in China, Vietnam, and Bangladesh.

The Remaining "Bottom Billion"

But what of the "bottom billion" those people remaining in the low income countries. There are several reasons to expect many other low income countries to rise to lower middle income status in coming decades. Foreign exchange to buy capital equipment is a key factor in the rapid growth of developing nations. Low income countries can expect growth, generally rapid growth in five sources of foreign exchange: 1. light industry, 2. Internet outsourcing, 3. rising natural resource prices, 4. workers remittances, and 5. foreign aid.

1. Light Industry

First, as China, India, Pakistan, Vietnam, and other formerly low income countries move up to more sophisticated industrial goods, low skill labor intensive industries will have to search for new sources of cheap labor. This means those industries will go to Bangladesh, which has long since become heavily involved in light industry. According to the World Bank more than 84% of the exports of Bangladesh were "textiles and textile articles," mostly cloth and clothing. In the period 2005 to 2007 exports of textiles and textile articles expanded at an average rate of more than 17% per year. But Bangladesh alone will not be enough, many other low income countries are likely to move into light industry, and grow rapidly as a result.

Those same low skill labor intensive export industries were key to the rapid growth of the Japan, Hong Kong, Singapore, Taiwan, South Korea, China, Pakistan and Vietnam. It is reasonable to hope these industries will also foster rapid growth in the remaining low income countries.

Up to this point many of those countries could not compete with China and its lethal combination of low wages and relatively high efficiency, but as China's wages rise with its per capita GNI poorer nations will be able to compete for those industries using their lower wages to attract the capitalists. Already the lower level industries are fleeing the coastal areas of China. While China as a whole is officially in the upper middle income range, some coastal areas are much farther advanced, approaching or actually achieving high income status. Some of those coastal industries have been and will continue to move into China's interior, but because of China's rapid growth, the wages in the interior may soon be too high to compete in the lower level, labor intensive industries. Therefore many of the factories are now fleeing China altogether for poorer, lower wage countries, and more will in the future.

The remaining low income countries will enjoy an advantage that China and other countries that previously grew through light industry did not have. While there used to be four or more pairs of hands in the low income countries, many of them anxious to sew t-shirts, for every back in the high income countries that needed to wear a t-shirt, the ratio is now about four backs in the high income nations for every three pairs of hands in the low income nations. With a much smaller supply relative to the demand, wages will tend to rise for the workers and export earnings will rise for the low income countries.

The increased wages will be good from a humanitarian point of view, but in addition to that, the increased export earnings will mean that more capital equipment can be imported, which will further speed economic growth.

Looking further into the future the percentage of world population living in high income countries will rise, which will increase the economic growth of the low income economies even more. Recently, there were about a billion people living in high income countries, there might well be three billion within fifteen years, as China, Brazil, Russia, Mexico, Turkey, and other less populous countries may make it to high income status.

The Failure of Some May Speed the Growth of Others

Not all low income countries will benefit from the rush of industry. Some low income countries like North Korea have governments that are so bad that they will keep the new industry out. Other low income countries like Afghanistan are unstable, or in the middle of a civil war. They will not be able to compete for light industry.

But the very fact that the workers in these countries will be shut out of world markets and therefore not be competing will facilitate the even more rapid growth of those economies where the governments are more reasonable and/or stable. The government of North Korea is bad for its people. It is also bad for South Korea, Japan, and the United States, but Bangladesh may benefit because North Korea is not setting up factories. Bangladesh may get the factories North Korea lost.

But as the more reasonable, open, and stable governments enjoy thriving rapidly growing economies there will be increasing pressure on the remaining governments of low income countries to open up or become stable. In the past even those poor countries that had good policies to facilitate light industry often did not have impressive growth. This allowed unreasonable men to take over those countries. More and more good behavior will be quickly rewarded and therefore good politicians and good policies are more likely to survive.

2. Internet Outsourcing

In addition to light industry, the Internet is proving another route out of low income status. Even India is having difficulty finding all the highly talented, intelligent people that the software and other high tech industries want. As a portion of each country's population is likely to have the abilities needed to compete in these high tech fields it seems likely that most poor countries can set up an Internet center where talented, intelligent people can work and bring in foreign exchange. Combined with natural resource exports, and light industry this income may well give them the foreign exchange they need to buy the capital goods that will raise their economies to lower middle income status.

A nice feature of both light industry and Internet outsourcing is they can be done in a city. The poor nation does not have to provide infrastructure, security, and other services to the vast countryside for these industries to grow. All they need is to set up the conditions in a single place, and the workers can come to that place.

3. Natural Resources

Third, the rapid growth of the Third World is driving up natural resource prices which will help some low income countries to move out of the low income category. Nigeria has already moved up to lower middle income status on the basis of higher oil prices. Sub-Sahara Africa has been growing fairly rapidly recently, and this probably reflects the rising natural resource prices. It seems likely that this will continue.

4. Worker's Remittances

Fourth, workers from low income countries working abroad will send part of their pay home, these are called worker's remittances. Already, this is a huge source of foreign exchange for low income countries. Low income countries earn almost as much money from worker's remittances as they do from exports. As countries like Brazil and Mexico approach high income status their workers are less likely to immigrate to developed countries, and more likely to return to their native country. Large out flows of workers from high income countries to these upper middle income countries are already occurring. This opens the opportunity for workers from poorer countries to come in to fill the jobs left by workers from richer developing countries. In the United States it has been noted that workers from lower middle income Central American countries are replacing Mexicans. Other than Haiti there are no low income countries with more than a million people in Latin America. But in the rest of the world low income countries may benefit by sending far more workers abroad.

5. Foreign Aid

As the population living in low income countries shrinks and the population living in high income countries expands there is likely to be more foreign aid per person living in the low income countries. This will help the low income population avoid starvation and the worst aspects of poverty, and may even help their economic growth.

For the poorer low income countries foreign aid is an important part of income. The poorest major country, is the Democratic Republic of Congo. Foreign aid is equal to more than 38% of the income that the country produced in 2011. Foreign aid came to $52 American per person living in the low income countries in 2011, which was equal to a little more than 9% of what they produced. Foreign aid is much less for lower middle income countries, $14 a year. So the more countries are able to help themselves the more aid is available to those that fall behind.

Conclusion and Consequences

In conclusion, the percentage of the world's population living in low income countries has declined rapidly and is likely to continue its rapid descent, driven by these five factors, light industry searching for low wages, Internet outsourcing searching for cheap talent, rising natural resource prices, more workers remittances as workers from low income countries replace the workers from high income and near high income countries, and increased foreign aid.

Knowing that these desperately poor nations will soon be less desperate, and are a path to development is good news, but it can also stimulate us to help the temporarily poor in this their time of need. We do not need to be too creative. We do not need to "teach them to fish." They are coming along fine, but they are still very poor and their children are still hungry. We can help them with the reasonable expectation that their children will retire in high income, developed nations.

Finally, humanitarians should encourage the free trade and globalization that is lifting so many, so rapidly out of poverty.

Related Links

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Last updated August 24, 2012

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