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Religion & Liberty: Volume 33, Number 4

Creating an Economy of Inclusion

    The poor have been the main subject of concern in the whole tradition of Catholic Social Teaching. The Catholic Church talks often about a “preferential option for the poor.” In recent years, many of the Church’s social teaching documents have been particularly focused on the needs of the poorest people in the world’s poorest countries. The first major analysis of this topic could be said to have been in the papal encyclical Populorum Progressio, published in 1967 by Pope Paul VI. Since then, every major Catholic Social Teaching document has reflected on the position of the poorest of the poor.

    In Populorum Progressio, Pope Paul VI describes how he had seen firsthand the poverty he was addressing:

    Before We became pope, We travelled to Latin America (1960) and Africa (1962). There We saw the perplexing problems that vex and besiege these continents, which are otherwise full of life and promise. On being elected pope, We became the father of all men. We made trips to Palestine and India, gaining first-hand knowledge of the difficulties that these age-old civilizations must face in their struggle for further development. Before the close of the Second Vatican Council, providential circumstances allowed Us to address the United Nations and to plead the case of the impoverished nations before that distinguished assembly.

    Catholic Social Teaching has for decades provided both guidelines and cautions for market economies that exclude marginalized populations. The question is, are those populations excluded by markets or from markets?

    The encyclical was subtitled “On the Development of Peoples.” It covered a number of questions, and not just material poverty. Indeed, the Catholic Church uses the phrase “integral human development” to describe the range of conditions that must be present if the development of a people is to be truly and authentically Christian. Nevertheless, material poverty was a significant concern of the pope—and of all his successors.

    Unsurprisingly, Pope Francis, who has a deep concern for the poor, continues the theme of considering the plight of the world’s poorest in his latest social encyclical, Fratelli Tutti. Indeed, consideration of the problems faced by the poorest countries is woven throughout the encyclical as if to remind the reader of the main theme: there is no geographical limit when answering the question “Who is my neighbor?”

    When discussing underdeveloped countries, Pope Francis has focused, in a sustained way, on factors such as corruption, rent-seeking, and violence, which have both an economic and moral character. These problems can be seen as “structures of sin” in the sense that, if one lives in a society beset by corruption, rent-seeking, and violence, it can become very difficult to extract oneself from its effects, and our culpability can be diminished because participation in society becomes impossible unless we sometimes partake in these deeply embedded evils. How, for example, do we behave if we have a truckload of perishable food destined for a poor town that we cannot take through customs without paying a bribe?

    When discussing underdeveloped countries, Pope Francis has focused on factors such as corruption, rent-seeking, and violence.

    In an apostolic exhortation, Evangelii Gaudium, Pope Francis wrote: “Just as the commandment ‘Thou shalt not kill’ sets a clear limit in order to safeguard the value of human life, today we also have to say ‘thou shalt not’ to an economy of exclusion.” From what followed, Pope Francis appeared to be criticizing markets for excluding people and, thus, promoting poverty. In a letter to popular movements in 2016, Pope Francis wrote, “Market solutions do not reach the peripheries.” As a statement of fact, this may be true. However, neither this problem nor the “economy of exclusion” is intrinsic to markets. People are not excluded by markets; they are excluded from markets.

    The Score So Far

    While Pope Francis and his predecessors have been right to focus on the dire poverty that remains in the world, it is important to examine the progress made between the publication of Populorum Progressio and 2023. Doing so helps us to understand better the conditions necessary for further progress. Despite the impression sometimes given in Church documents, as an empirical matter we can observe that the past 50 years have seen the largest reduction in poverty the world has ever known. Not only that, we have also seen the first substantial and meaningful reduction in inequality at a global level in the economic history of the world. This is important. Something has gone right in the past 50 years, and we should learn from that.

    Riverside town in Lagos, Nigeria
    (Photo by viti / iStock)

    In 1967, 45% of the world’s population lived in extreme poverty—that is, without enough money to buy the basics of food, shelter, clothing, etc. By 2018 that proportion had fallen to 10%. As much progress was made in reducing dire poverty between 1967 and 2018 as in the whole of the rest of the world’s economic history. This success is even more stunning when we consider the increase in the world’s population. The number of people in absolute poverty halved, while the number of people living above the poverty line increased from fewer than 2 billion to nearly 7 billion. Clearly something has gone right.

    There has been enormous progress in relation to other measures of well-being, too. In 1970 around one-third of the world’s population was illiterate. By 2016 this had fallen to 14%. The ratio of the average years of schooling for girls to that of boys rose from 57% in Sub-Saharan Africa to 82% in roughly the same period. In the past 20 years alone, the proportion of women who die from pregnancy-related causes has fallen by more than a third.

    There is little doubt that we have been experiencing the most incredible period we have ever known in terms of improving how we are meeting basic material needs and achieving better education and health outcomes. Perhaps more surprisingly, we are also experiencing the first meaningful reduction in inequality the world has ever known.

    If we look at the distribution of world incomes in 1800, we see that virtually the whole of the world’s population lived in absolute poverty. (See chart.) The world was relatively equal—there was an equality of misery. Living standards across the world were dire. If we fast-forward to 1975, just after the publication of Populorum Progressio, and examine the distribution of world incomes, the world’s population is clearly divided into two. It’s as if we lived on two separate planets—hence the phrases “First World” and “Third World” in vogue at the time. The rich world had pulled away from the poor world. Much of the world’s population, though, was still desperately poor. By 2015 the shape of the distribution of world incomes is similar to that in 1800, but the world is no longer divided into two. What used to be described as the “Third World” has now become much richer. The poor have, at least partially, caught up with the rich. Although the distribution of world incomes is a similar shape to that in 1800, it has moved dramatically in the right direction. This is an extraordinary achievement and one that could surely not have been envisaged by the drafters of the 1967 encyclical.

    In 1967, 45% of the world’s population lived in extreme poverty. By 2018 that proportion had fallen to 10%.

    Nevertheless, 10% of the world’s population still live in dire poverty. And many more are stuck just above the absolute poverty line unable to progress. Also of great concern is the fact that the proportion of people living in absolute poverty seems to have started to increase in the past two or three years. If we are to make progress again, we need to understand how the immense progress of the past 40 years came about.

    How Have We Made This Progress?

    It is clear that reductions in the extent of civil conflict, improvement in conditions for developing business, increase in trade and globalization, the expansion of democracy, and the development of the institutional conditions necessary for the reduction of poverty were key to development. Indeed, China demonstrates that relatively little progress has to be made in these respects for countries to make substantial inroads into poverty. China could hardly be described as a “free country,” and yet liberalization from its Maoist inheritance was key to one of the most rapid transformations of an economy in history.

    Indeed, examining the progress of individual countries further is instructive.

    In 1990, Vietnam was, perhaps, the poorest country in the world. It began to institute market-oriented reforms. Like China, it did not allow a capitalist economy to evolve of the type that exists in most Western countries, but there was a considerable extension of economic freedoms, especially in relation to trade. The absolute poverty rate in Vietnam fell from about 90% to about 5% in just 30 years.

    Mao Tse-Tung’s likeness featured on renminbi banknotes, the official Chinese currency of the People’s Republic of China
    (Photo by kody king / iStock)

    In 1989, Poland was one of the poorest countries in Europe, with average incomes of around one-tenth the level of Germany. (After allowing for differences in purchasing power, however, the standard of living was, perhaps, somewhat less than one-third the level of that in Germany.) Polish incomes lagged behind those of some African countries. Then came the market reforms of 1989 onward, which led to the highest growth rate in Europe. Lives were transformed from drabness (at least in material terms) in which, as a visiting lecturer, I would have to take my own chalk and toilet paper. Average incomes in Poland are now drawing close to those in the rest of Europe.

    We can debate whether tax systems, welfare policies, and so on are better in Holland than in the U.K., better in Denmark or in the U.S., or better in Australia or in Germany. However, all these countries are prosperous and have capitalist economies in which freedom of contract, the rule of law, free trade, and freedom to establish businesses reign, even if these freedoms are manifested and constrained in different ways in the different countries. These countries also have legal and political systems that largely support these free-market institutions. All these countries contrast with, for example, Venezuela and Zimbabwe. As countries around the world have, to a greater degree, adopted the basic institutions necessary for a market economy, they have prospered. And this prospering has been the driving force of reduced poverty and the reduced inequality of a kind we have never seen before.

    Pope John Paul II both recognized and anticipated these developments when he wrote in his encyclical letter Centesimus Annus (1991):

    Even in recent years it was thought that the poorest countries would develop by isolating themselves from the world market and by depending only on their own resources. Recent experience has shown that countries which did this have suffered stagnation and recession, while the countries which experienced development were those which succeeded in taking part in the general interrelated economic activities at the international level.

    The Political Economy of Exclusion

    But, as noted above, the Catholic Church regularly, and quite rightly, draws attention to the dire poverty that remains or, as Pope Francis has put it, to “the economy of exclusion.” Perhaps it would be better described, however, as the “political economy of exclusion.” People suffer from the failure of political institutions within their countries and, as a result, are excluded from normal economic life. Civil conflict, corruption, rent-seeking, and cronyism are at the root of the dire poverty of perhaps 1 billion people today. These problems are also responsible for trapping many more in a state that is far from one of economic flourishing. Again, people are not excluded by markets; they are excluded from markets by structures of political economy that prevent market exchange and sustainable investment reaching the peripheries.

    “‘Blasts’ from the Ram’s Horn,” a 1902 political cartoon depicting bribery

    The Catechism of the Catholic Church is very clear about the responsibilities of the state:

    Economic activity, especially the activity of a market economy, cannot be conducted in an institutional, juridical, or political vacuum. On the contrary, it presupposes sure guarantees of individual freedom and private property, as well as a stable currency and efficient public services. Hence the principal task of the state is to guarantee this security, so that those who work and produce can enjoy the fruits of their labors and thus feel encouraged to work efficiently and honestly.

    Corruption is one of the reasons why states do not perform adequately their proper functions. Indeed, the Compendium of the Social Doctrine of the Church specifically cites corruption as a major impediment to the promotion of the common good:

    Among the deformities of the democratic system, political corruption is one of the most serious because it betrays at one and the same time both moral principles and the norms of social justice. … Corruption radically distorts the role of representative institutions, because they become an arena for political bartering between clients’ requests and governmental services. In this way political choices favour the narrow objectives of those who possess the means to influence these choices and are an obstacle to bringing about the common good of all citizens. [emphasis in original]

    As noted above, structures can be created whereby it is impossible for those who do not wish to embrace corruption to partake fully in economic and political life.

    We can illustrate this problem with a simple example. Consider a situation where a group of firms are bidding for a government contract. One of the firms might be a paragon of ethical behavior in every respect. It may also produce an excellent product. If the other companies are offering bribes to win the contract, how does the “ethical” company behave? If it offers the bribe, it is participating in the sinful structures. If it does not, a company offering an inferior product and that behaves unethically in every respect may win the contract.

    Pope Francis has discussed the subject of corruption at greater length than his predecessors, perhaps reflecting his Latin American experience. In his 2020 social encyclical, Fratelli Tutti, for example, Pope Francis states: “For many people today, politics is a distasteful word, often due to the mistakes, corruption and inefficiency of some politicians” and “the misuse of power, corruption, disregard for law and inefficiency must clearly be rejected.” In his 2015 encyclical on the environment, Laudato Sí, corruption is mentioned several times. It is pointed out that “when the culture itself is corrupt and objective truth and universally valid principles are no longer upheld, then laws can only be seen as arbitrary impositions or obstacles to be avoided.” Countries are then exhorted to combat corruption. Linking political corruption with business, he suggests that the culture of corruption can lead business groups to “come forward in the guise of benefactors, wield real power, and consider themselves exempt from certain rules, to the point of tolerating different forms of organized crime, human trafficking, the drug trade and violence, all of which become very difficult to eradicate.”

    Diezani Alison-Madueke at the Ending Energy Poverty Session of the World Economic Forum on Africa in 2021

    The Practical Reality of Corruption

    Nigeria is ranked 150th out of 180 countries for corruption, and examples from that country illustrate these above points well. Diezani Alison-Madueke, the former minister for petroleum resources in Nigeria, is said to have embezzled $1.6 billion by awarding contracts to shell companies owned by business associates. The proceeds are alleged to have been laundered through companies and banks in the U.K., U.S., Switzerland, and the British Virgin Islands (including to buy an $80 million yacht built in Holland). It was expected that the money would be used to further the reelection of the former president, but it is clear that much has been used to enrich her personally.

    Sadly, corruption is part of everyday life in that country: 30% of Nigerian citizens who had contact with public officials in 2019 were asked to pay a bribe. Those who paid a bribe, on average, paid six bribes a year. Roughly half of those who refused to pay a bribe reported negative consequences. The way in which this becomes ingrained in culture, and structures of sin, is obvious. If bribery is widespread and a bribe is not paid, one may receive a fine for an offense that has not been committed, somebody who needs urgent hospital treatment may not receive it, or a company wishing to export produce may not be able to obtain a license.

    Other aspects of poor governance also contribute to the political economy of exclusion. If the government does not respect private property, and if it is not possible for people to establish businesses with reasonable ease, it will be impossible for the great majority of individuals to prosper. People will not work if they’re not able to keep the fruits of their labor, there will be little investment, and families will not be able to invest in the upkeep of their homes and in the necessary infrastructure (garbage disposal, sanitary waste treatment, the provision of water and electricity, and so on) if there is no guarantee that their rights of ownership over the property in which they live will be enforced. This leads to many people living in slum conditions or “informal” settlements—23% of the world’s population, according to the United Nations.

    Also, if people cannot establish legally registered businesses easily because the processes are so complex or subject to corruption, then economic resources will be concentrated in the hands of incumbents or those able to navigate the political system effectively. In addition, many businesses will be unregistered and will remain small, will not advertise, and will not offer proper contracts of employment to their employees because they will not be enforceable. In short, businesses will endeavor not to come to the attention of the authorities and, if they do, may have to pay bribes in order not to be fined or closed. According to World Bank data, it takes one day of person-time to register a business in New Zealand, four days in the United States, 33 days in the Philippines, and 230 days in Venezuela. In addition, if court systems are inefficient or corrupt, crime is likely to thrive, and violent means will be used to enforce contracts. Furthermore, civil conflict, as well as unleashing terror on peoples and wasting economic resources directly, undermines the ability of people to partake in economic activity.

    These problems are all related. In times of civil conflict, judicial systems are less likely to function properly, and corruption may become common. If court systems are beset by corruption, property rights and contractual rights become insecure because legal decisions will not depend on justice but on who has successfully abused the corrupt system. If this happens, business activity and investment can collapse because those involved can never know whether they will obtain the fruits of their economic activity.

    The following table shows the top 10 and 10 of the bottom 20 nations in the world ranked by the level of corruption according to the Transparency International Corruption Perceptions Index. In the third column, the countries are ranked by one of the many indices of global well-being. Global well-being indicators are not available for all countries, so 10 countries have been chosen from the bottom 20 of the corruption index for which there is also a ranking in the well-being index. The relationship between corruption and well-being is very clear. It should be noted that there is not widespread agreement about the factors that should enter an index of well-being and how they should be weighted. However, if the countries were ranked by almost any metric related to human development—such as national income per head, average years of education, maternal mortality, or life expectancy—a very similar relationship would be found.

    Do We Need a New Consensus?

    In the 1980s and 1990s, a number of countries enacted reforms that followed the “Washington Consensus.” This was a series of economic and political policies that involved promoting free markets and better governance. Inflation and government borrowing were to be reduced, privatization undertaken, and so on.

    The Washington Consensus has been strongly criticized by some economists, such as Joseph Stiglitz and Mariana Mazzucato, and by campaigners such as Naomi Klein. Its tenets have been ignored in an increasing number of countries such as Venezuela and, for much of the past 20 years, Argentina. Certainly, there is no longer a consensus behind the Washington Consensus. It is true that the recommendations of the Washington Consensus cannot just be implemented unthinkingly as a blueprint. There can be problems, for example, if countries conduct privatization programs while beset with corruption; this can lead to the concentration of economic power in the hands of oligarchs and bring the whole idea of a free economy into disrepute. But there is much that is valuable about the program, nevertheless.

    For Christians, the most important message is that economic and political activity does not take place in a moral vacuum.

    The Nobel Prize–winning economist Kenneth Arrow once wrote: “Virtually every commercial transaction has within itself an element of trust. … It can be plausibly argued that much of the economic backwardness in the world can be explained by the lack of mutual confidence.” In a similar way, Pope Benedict noted, “Without internal forms of solidarity and mutual trust, the market cannot completely fulfil its proper economic function (emphasis in original).

    The building of the virtue of trust in economic and political life, the elimination of civil conflict, and a reduction in corruption are all necessary if those who are excluded from markets are to prosper. Other Washington Consensus policies, such as sound money, responsible fiscal policy, and appropriate privatization, are surely still appropriate and consistent with Catholic Social Teaching.

    The sequencing of policies may be important. As noted above, privatization in the context of a corrupt political system can be the parent of the economy of exclusion. On the other hand, the deregulation of trade and business can remove opportunities for corrupt officials to enrich themselves at the expense of small businesses. The elimination of corruption can provide a more solid foundation for other sensible reforms.

    For Christians, however, the most important message is that economic and political activities do not take place in a moral vacuum. Not only do political and economic conditions have to be right, but the moral culture has to be right, too, so that economic freedom is put at the service of humanity and the political structures support rather than work against this objective. As John Paul II put it, economic freedom is an aspect of human freedom, the core of which must be ethical and religious. If we have both the right economic policies and a culture that nurtures the virtues in economic and political life, we can make further inroads into eliminating the economy of exclusion. But we must do this by promoting both a free anda virtuous society and not by pursuing one of these objectives without any consideration of the need for the other.

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    Philip Booth is director of Catholic Mission and professor of finance, public policy, and ethics at St. Mary’s University, Twickenham, the U.K.’s largest Catholic university. He is also an actuary and has a Ph.D. in finance, and worked previously for the Institute of Economic Affairs and the Bank of England.


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