The Predictable Nature
of Poverty

by Dexter Samida

There exists a general perception that capitalism, while very good at generating technological progress, tends to leave the impoverished behind while making advancements for the rest of society. In a Labour Day tribute, Gordon Christie, Executive Director of the Calgary and District Labour Council, echoed this sentiment by deriding the Alberta government for its support of the “corporate agenda.” Mr. Christie asserted, in the September 2, 1997 edition of the Calgary Herald, that “privatization, deregulation, workfare, and government cut-backs” were part of an “assault on Alberta’s working poor.” Similarly, the April 12, 1998 edition of the Toronto Sun reported that a member of an anti-poverty group, dressed in a bunny suit complete with ears and whiskers, claimed that a major grocery chain was “profiting from hunger.” While it seems obvious that grocery stores exist to feed hungry people, the implication of this individual’s comments was that the grocery store was making unearned profits and, according to this bunny, “you could feed a lot of people with that money.” Also, in an April 7, 1998 letter to the editor published in the Financial Post, Karen Hodgson claimed that “promoting adoption of Western capitalism… as a solution to poverty is more likely to perpetuate historical exploitation.” Given this widespread distrust of markets to help the poor, should we view government intervention as the only way of reducing poverty? An examination of Canadian data suggests otherwise. By using a measure of economic freedom (the extent to which economic freedom exists in a jurisdiction can be thought of as the extent to which capitalism exists) one can see how poverty in a given age group increases or decreases over time.

The Fraser Institute developed the Provincial Economic Freedom Index (PEFI) to measure economic freedom among the Canadian provinces. The PEFI uses objective indicators such as tax rates, minimum wage legislation, government consumption, and government expenditures on regulation to derive an estimate of economic freedom. If “capitalism” or the “free market” is detrimental to the plight of the poor, then this index should be positively related to the number of poor in a province.¹ In other words, if capitalism is the problem, a higher score in the index should translate into a greater amount of poverty.

Poverty tends to be a condition of youth and old age,² so our ultimate concern should be the well being of individuals over time, and not individuals that happen to be of similar age in different time periods. Thus, it would be inaccurate to compare individuals who were 25 to 34 years old many years ago with those who are presently 25 to 34 years old. A more accurate assessment would be to look at those aged 25 to 34 in ten years when they were 35 to 44 years old to see whether their conditions improved or worsened. This analysis looks at Canadians who earned less than $12,500 (in real terms) over a seven-year period.³ In 1989, the percentage of 25- to 34-year-olds earning under $12,500 ranged from 33.4 percent in Newfoundland to 22 percent in Ontario.⁴ By 1996 most of the people in this age group were 35 to 44 years old. The percentage of those earning less than $12,500 (in 1989 dollars) ranged from 32.8 percent in Newfoundland to 20.7 percent in Ontario.⁵ In every province the level of poverty in this age cohort had declined. What were the factors behind this improvement? Time clearly is relevant because as people become better educated, receive on-the-job training, and gain work experience, their incomes rise. Time, however, cannot explain the differences among provinces. If poverty is truly a condition of capitalism, then the differences between the provinces should be attributable to economic freedom, or “capitalism.” This analysis does indeed show that the difference among the provinces is related to the level of capitalism in a province. Unfortunately for the activists quoted above, the relationship is opposite to that which they hypothesized. This examination suggests that a higher score in the PEFI (which is equivalent to having more economic freedom), correlates with lower levels of poverty. In fact, this analysis suggests that a one-point increase in the PEFI implies that 2.0 percent more of the population will move above the $12,500 (in 1989 dollars) threshold in annual income.

There is a demonstrable link between economic freedom and the average income within a province. It should not be a surprise that economic freedom also plays a role in alleviating poverty. Economic freedom gives everyone the chance to participate in the wealth creating processes of the market. Less government means more opportunities for work and investment, while lower taxes allow individuals to keep what they earn. Given the role economic freedom plays in spreading prosperity, wouldn’t it be nice to hear anti-poverty advocates demanding more economic freedom as a means of reducing poverty?

Endnotes

1The reason for this is because the index gives lower scores to actions by government that traditional poverty lobby groups advocate for alleviating poverty, such as high top marginal tax rates, redistribution policies, and higher minimum wages.

2Those first entering the work force or enrolled in university tend to have low incomes, as do those who are living off their retirement savings. Since people are constantly moving in and out of age and income categories, it is very difficult to monitor poverty over time. For instance, when college enrolments increase, traditional poverty estimates increase as well. A better way of monitoring poverty is to examine the incomes of a certain age cohort as time passes.

3A threshold of $12,500 was used because of the availability of this data across provinces. It would be more correct to call these people low-income rather than poor.

4Statistics Canada, cat. 13-207, 1989.

5Statistics Canada, cat. 13-207, 1996.

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Last Modified: Wednesday, October 20, 1999.