Global poverty: Measurement and critique

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Global povertyMeasurement and critique

• Lectures 4 and 5

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Poverty measurement an introduction

• The following slides have been, almost in
  entirety, kindly provided by Martin Ravallion and
  Shaohua Chen

3
Core axioms
Poverty measures

• Focus A small change in economic welfare for the
  non-poor cannot change the measure of poverty
• Monotonicity A small increase in economic
  welfare for the poor must reduce the measure of
  poverty
• Sub-group monotonicity An increase in poverty
  for any sub-group of the population must increase
  aggregate measure of poverty.
• Transfer A small transfer of income from a poor
  person to someone who is poorer must decrease the
  measure of poverty (also called weak transfer
  axiom)

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Head-count index

• q no. people deemed poor n population size
  
• Advantage easily understood
• Disadvantages insensitive to distribution below
  the poverty line
• The headcount index fails both the Monotonicity
  and Transfer Axioms

Question What happens to H if a poor person
becomes poorer?
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Large gains to the poor but no change in the
headcount index
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Poverty gap index

• y1,...., yq lt z lt yq1, ..., yn
• Advantages of PG reflects depth of poverty
• Disadvantages insensitive to severity of poverty
• Example A (1, 2, 3, 4) B (2, 2, 2, 4)
• Let z 3. HA 0.75 HB PGA 0.25 PGB.
• The Poverty Gap Index fails the Transfer Axiom

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Redistribution amongst the poor, but no change
in the poverty-gap index
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Interpretation of PG

• The minimum cost of eliminating poverty is
  (z-?zz)q gt perfect targeting. (?zmean for
  poor)
• The maximum cost of eliminating poverty zq
• gt No targeting.
• Ratio of minimum cost of eliminating poverty to
  the maximum cost with no targeting
• Poverty gap index potential saving to the
  poverty alleviation budget from targeting.

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Squared poverty gap index

The SPG satisfies all five core axioms Example
A (1, 2, 3, 4) B (2, 2, 2, 4) z 3
SPGA 0.14 SPGB 0.08 Advantage of SPG
sensitive to differences in both depth and
severity of poverty. Disadvantage difficult to
interpret

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Foster-Greer-Thorbecke class of measures

P0 Headcount index P1 Poverty gap index P2
Squared poverty gap index
Further reading James Foster, James, J. Greer,
and E. Thorbecke. 1984. A Class of Decomposable
Poverty Measures, Econometrica 52 761-765.
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The welfare ratio

• Add up expenditures on all commodities consumed
  (with imputed values at local market prices) and
  
• Deflate by a poverty line (depending on household
  size and composition and location/date)

real expenditure or welfare ratio
price paid by household i for good j
quantity consumed of good j by i
But what is z?
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The theoretically ideal poverty line

• The ideal poverty line should then be the
  minimum cost to a given individual of a reference
  level of welfare (z) fixed across all individuals

e(.) expenditure function, giving minimum cost
of achieving Uz when facing prices p and with
characteristics X.
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Linear approximation
basic consumption needs (at poverty level of
welfare) i.e., the poverty basket
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Two generic problems

• Identification problem how to weight aspects of
  welfare not revealed by market behavior.
• How do family characteristics (such as size and
  composition) affect individual welfare at given
  total household consumption?
• How to value command over non-market goods
  (including some publicly supplied goods)?
• How to measure the individual welfare effect of
  relative deprivation, insecurity, social
  exclusion?
• Referencing problem determining the reference
  level of welfare above which is deemed not to be
  poor the poverty line (z) in welfare space,
  which must anchor the money-metric poverty line.
• Poverty measurement in practice attempts to
  expand the information base for addressing the
  identification and referencing problems

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Global poverty line (at the World Bank)

• The following slides have been, almost in
  entirety, kindly provided by Martin Ravallion and
  Shaohua Chen

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How to determine z in a global context?The
theoretical ideal poverty line

• For informing anti-poverty policies, a poverty
  line should be absolute in the space of welfare
• This assures that the poverty comparisons are
  consistent in that two individuals with the same
  level of welfare are treated the same way.
• As long as the objectives of policy are defined
  in terms of welfare, and policy choices respect
  the weak Pareto principle that a welfare gain
  cannot increase poverty, then welfare consistency
  in poverty comparisons is satisfied.

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Poverty lines across countries

• Richer countries tend to have higher poverty
  lines.
• Amongst poor countries, there is very little
  income gradient across countries in their poverty
  lines absolute consumption needs dominate.
• But the gradient rises as incomes rise.
• Also avoid idiosyncratic national effects, so
  take averages

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Log poverty line at PPP
Elasticity1 amongst rich countries
Elasticity0 amongst poor countries
1 a day
Log consumption per capita at PPP
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How was 1 a day developed? (World
Development Report 1990)

• International line should not fall outside the
  range of national lines.
• Richer people and richer countries tend to
  have higher poverty lines.
• Amongst poor countries, there is very little
  income gradient across countries in their poverty
  lines absolute consumption needs dominate.
• But the gradient rises as incomes rise (see the
  previous figure)
• In the 1990 WDR, the Bank chose to measure global
  poverty by the standards of what poverty means in
  the poorest countries.
• gt the 1/day line.

Further reading Shaohua Chen and Martin
Ravallion, How Have the Worlds Poorest Fared
Since the Early 1980s? World Bank Research
Observer, Vol. 19, No.2, Fall 2004, pp. 141-170.
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1 a day poverty lines

• We chose the median poverty line of the lowest 10
  lines from original WDR 1990.
• This gives 1.08 at 1993 PPP for consumption.
• Regression based method gives 1.05 (95 CI
  0.88,1.24) for poorest country.
• All poverty estimates are revised back in time to
  assure consistency.

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Global poverty results, 1981-2004

• The following slides have been, almost in
  entirety, kindly provided by Martin Ravallion and
  Shaohua Chen

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Latest update 1981-2004 (prior to publication of
new 2005 PPPs)

• Trend decline in the headcount indices
• For both 1 and 2 per day lines, the trend is
  about 0.8 points per year over 1981-2004.
• This is more than the rate of poverty reduction
  of 0.6 points per year that would be more than
  enough to halve the 1990 1 a day poverty rate by
  2015, which is first of the first of the
  Millennium Development Goals (MDG1).
• First time we have seen the number of people
  living below 1 a day fall below 1 billion.

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Evolution of poverty measures over 1981-2004
Headcount indices and numbers
of poor
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Success in reaching MDG will still leave a lot of
poverty in the world!

• The trend over 1981-2004 in the number living
  below 1 a day is about 17 million fewer people
  living under 1 a day per year.
• At this rate of decline, there will still be over
  800 million people living under 1 a day in 2015,
  even though the 1990 poverty rate will have been
  halved.
• Progress has been slower for the 2 line.
• Projecting forward linearly implies a headcount
  index for this line of about 40 in 2015, well
  short of the 30 figure needed to halve the 1990
  index.
• And some regions (esp. Africa) are well off track
  in even reaching MDG.
• China has reached MDG1 for any chosen poverty
  lines.

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The weight of China

• The trend rates of decline in the headcount
  indices are roughly halved when one focuses on
  the developing world outside China.
• When we exclude China, we find a fairly static
  picture in terms of the number of people living
  under 1 a day, with no clear trend,
• and a clear trend increase in the number of poor
  by the 2 a day poverty line.

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Poverty measures by region 1981-2004 Headcount
and number of poor for 1 a day
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Faster progress against rural poverty
1 a day
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Rising number of urban poor falling number of
rural poor
100 million fewer 1 a day poor 150 million
fewer rural poor - 50 million more urban poor.
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Critique of World Bank global poverty measurement

• Based on work of Thomas Pogge and Sanjay Reddy

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Pogge and Reddy critique of Banks methodology

• The use of PL typical of poor countries is too
  low does not ensure fulfillment of calorific
  needs
• The critique gains strength from the fact that
  global poverty HC evolution is quite different if
  we choose PPP 1 or PPP 2 poverty line (see
  Chen, Ravallion)
• 1 PPP93 translates into 600 in 2008 US prices
  gt less than ½ of the minimum food expenditures
  according to USDA

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• Poors consumption patterns not taken into
  account
• Commodity irrelevance if there is more
  spending on X (say, services not consumed by the
  poor), it will influence PPPs more (its weight
  ?). Partially addressed through new PPPP.
• Country irrelevance Income of the poor in India
  increases because price of services in the US
  increases. Not only true for bilateral
  comparisons, but prices and spending in a third
  country influence Indias PPP (needed to insure
  PPPs transitivity).
• irrelevant for avoidance of poverty.

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PPP transitivity

• PPP static transitivity (between countries)
  assured
• PPP dynamic transitivity (between t and t1) does
  not hold

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Question how many 2005 rupees are worth in
purchasing power terms 1 international dollar of
year 2005?

• Update local poverty line. 1 PPP93 6.03 rupees
  (direct comparison). Indias CPI between 1993 and
  2005 2.13. gt 1 PPP93 12.84 rupees of year
  2005.
• Answer 1. 1 PPP93 6.03 rupees. 1 PPP93 1.35
  PPP05 using US CPI for conversion. gt 1PPP05
  (12.84/1.35) 9.51 rupees of year 2005.
• Answer 2. ICP direct price comparison 1PPP05
  14.7 rupees of year 2005.
• Difference 36 percent (9.51 vs. 14.7 rupees).

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Several ways to calculate LC poverty line

• How to update local PL () LC equivalent in year
  t1 of PPP1 in t year PPP in year t x CPI of
  the country (btw. t and t1)
• Method 1 Calculate the value of PPP 1 in year
  t1 PPP1 in year t / US CPI, and then multiply
  by ()
• Method 2 Direct (ICP) calculation of PPP1 in
  year t1 (Recall that the new PPP will depend on
  what happened with prices and expenditures in all
  countries! Not only US and India).

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Choice of PPP year influences the results

• The Banks method makes the classification of
  millions of peopletoday and in the past and
  future yearsdependent on the arbitrary choice of
  PPP base year (Pogge, 2008)
• Pogge and Reddy proposal is to define poverty
  basket for each individual country