Toward Better Global Poverty

Measures

Martin Ravallion

Georgetown University

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Presentation at WIDER 30th annual conference, Helsinki,

September 2015

Poverty monitoring must be socially relevant

• An approach to measurement that is out of step with social thought and the aims of social policy will become irrelevant.

• The current focus on counting the poor relative to a fixed absolute line needs to be complemented by new measures.

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The “elephant in the room:”

Social effects on welfare

Social effects on welfare

• Poverty measures that use a constant real line do not take account of the concerns people face about relative deprivation, shame and social exclusion. These are specific to place and time.

• The overriding principle: poverty is absolute in the space of welfare: “…an absolute approach in the space of capabilities translates into a relative approach in the space of commodities” (Amartya Sen, 1983)

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Why do we see higher (real) poverty lines in

richer countries?

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0.0 0.5 1.0 1.5 2.0 2.5 3.0 3.5 4.0 4.5 5.0

Log private consumption per capita ($PPP per day)

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$P

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Luxembourg

USA

Two possible reasons for higher lines in richer

countries

1. Social norms: Richer countries implicitly use a higher reference level of welfare for defining poverty. Then we would want to use a common social standard an absolute line in terms of real income.

2. Social effects: Relative deprivation or rising costs of social inclusion (avoiding shame). Then a relative line is called for if we are to be absolute in the space of welfare.

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But we do not know which is right!

The big uncertainty about global poverty

• We may never resolve the matter from conventional empirical evidence.

• This uncertainty makes it compelling to consider both approaches when measuring global poverty.

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Proposed bounds to global poverty

• Absolute poverty measures can be interpreted as the lower bound to the true welfare-consistent measure.– The lower bound assumes that the relativist gradient only reflects

differing social norms.

• A weakly relative measure of poverty provides its upper bound, allowing for social effects on welfare. – The upper bound assumes that the relatavist gradient stems solely

from social effects on welfare—extra spending needed to attain the same level of welfare in richer countries.

• Strongly relative measures (e.g., 50% mean) are implausible.

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Lower bound + upper bound

Poverty line ($ per

day; 2005 PPP)

Slope=1/2

$1.25/day

$1.25/2

Upper

bound

Excellent fit with data on national lines9

2/]0,25.1$max[25.1$)( itit MMZ

25.1$)( itMZ (lower bound)

(upper)

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1980 1984 1988 1992 1996 2000 2004 2008 2012

Headcount index (% below poverty line)

Upper bound:

absolute + relative

Lower bound:

absolute poverty

Poverty measures for the developing world

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Rising proportion of relatively poor: 80% of the relatively poor in 1981

were absolutely poor, but by 2008 the

proportion had fallen to under half.

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500

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1981 1984 1987 1990 1993 1996 1999 2002 2005 2008

Number of poor in millions

Numbers of poor

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Absolutely poor

Relatively poor but not absolutely poor

Two-thirds of the increase in the number of people who are

relatively poor but not absolutely poor is accountable to the

decrease in the number of absolutely poor.

Upper

bound

Lower

bound

Monitoring progress in assuring that

no one is left behind

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The 2013 U.N. report on setting new development

goals argued that: “the indicators that track them

should be disaggregated to ensure no one is left

behind.”

New trajectory for average household

consumption in the new millennium

Were the poorest left behind?

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0

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2

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1980 1984 1988 1992 1996 2000 2004 2008 2012

Mean consumption per person ($ per person per day)(Developing world)

A widely held view: poorest left behind

• “The poorest of the world are being left behind. We need to reach out and lift them into our lifeboat.” U.N. Secretary-General Ban Ki-moon, 2011

• “Poverty is not yet defeated. Far too many are being left behind.” Guy Ryder, ILO

• And in 2015 the Vatican’s representative to the U.N. reaffirmed that the poorest of the world are being left behind.

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Yet economists appear to tell a very

different story

• We hear adages such as “a rising tide lifts all boats” or claims that “growth is good for the poor” (Dollar and Kraay) or that there has been a “breakthrough from the bottom” (Radlet).

• Economists have mostly supported this alternative view, drawing on evidence such as this =>

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Reduction in the incidence of absolute

poverty

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1980 1984 1988 1992 1996 2000 2004 2008 2012

$2.00

$1.25

$1.00

$0.87

$0.77

$0.67

$0.50

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Note: All in 2005 prices at purchasing power parity

How can we understand these

conflicting views?

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Assessing progress against poverty 1:

The counting approach

• Arthur Bowley and many others since.

• Theoretical foundations in a large literature, in which various axioms have been proposed.

– Focus, monotonicity, subgroup monotonicity, scale invariance, transfer principle,….

• The counting approach includes counts with unequal weights (such as PG, SPG, Watts)

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Assessing progress against poverty 2:

The Rawlsian approach

• Focuses on a consumption floor—the lowest expected level of living.

• John Rawls: Maximize advantages of the least advantaged

• If the poorest person sees a gain (loss) then (by definition) the consumption floor must rise (fall).

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Arguments for studying the floor

• Rights-based approaches to justice

– Justice must be concerned with each citizen not averages

– Rights must be secured for all; none left behind.

• Mahatma Gandhi’s talisman:

– “Recall the face of the poorest and weakest person you have seen and ask if the step you contemplate is going to be any use to them.”

• Social policies also aim to raise the floor above the biological minimum for survival.

– Statutory minimum wage rates: first appeared in late 19th

century in an effort to help raise the consumption floor.

– Basic-income guarantee (BIG): A firm floor. “Right of

citizenship” rather than targeted based on “need.”

– Social policies explicitly aim to raise the floor (Dibao, NREGS)20

The counting approach may miss what is

happening at the floor

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Same reduction in the poverty count but different

implications for the poorest

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Poorest left behind Same reduction in the incidence of poverty but without leaving the poorest behind

Measure of

welfare

Cumulative % of

population

Measure of

welfare

Cumulative % of

population

Poverty

line

Poverty

line Floor stays put

Rising floor

How can the floor be estimated?

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We cannot be sure that the lowest

consumption in a survey is the floor

• Identifying the floor as the strict lower bound of the empiricaldistribution of consumption could well be subject to idiosyncratic transient factors.

• We need an approach that is more robust to transient effects and measurement errors, but is still operational.

• Given the uncertainty, a probabilistic approach is called for. However, the weights are positive not normative.

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Assumptions and main result

• Beyond some critical level of observed consumption there is no longer any chance of being the poorest person in terms of latent permanent consumption.

• For those observed to be living below y* the probability of observed consumption being the true lower bound of permanent consumption falls linearly as observed consumption rises until y* is reached.

• Under these assumptions:

SPG and PG are the Foster-Greer-Thorbecke measures.

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)/1()( ***min PGSPGyyyE

Focusing on the floor gives a very different

picture to the counting approach

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Estimated mean floor = $0.67 a day

• With y* = $1.25, $0.67 (averaging all years)

• 95% confidence interval: ($0.47, $0.87).

• This is remarkably close to Lindgren’s (2015) (independent) estimate of the cost of a “barebones basket” of food items.

• Slow growth in the floor—at 0.4% per annum

• And unresponsive to growth in the overall mean consumption.

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)( min yyE

Much less progress in raising the

consumption floor

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1980 1984 1988 1992 1996 2000 2004 2008 2012

Overall mean for

developing world

Consumption floor: expected level of lowest consumption

Mean consumption ($ per person per day)

$0.67 on average

No sign that the new

Millennium raised the floor

Yes, the poorest have been left behind!Fewer people living near the floor, but little change in the floor

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Percentile

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Consumption or income per person ($ per day, 2005 prices)

1981

2011

Difference (2011-1981)

Long-term perspective: Today’s rich world

• The level of the floor doubled in today’s rich world over 100 years after 1850.

• The annualized rate of growth in the floor over this period in today’s rich world was 0.7%, about double the rate we have seen in the developing world over the last 30 years.

• Compared to the developing world over the last 30 years, today’s rich world over 1850-1950 was slower at reducing poverty by the counting approach but faster at raising the floor.

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Conclusions: Two additions to the dashboard

of poverty indicators

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Bounds to the true welfare-consistent measure

• Two global poverty lines are needed—a familiar lower line with fixed purchasing power across countries and a new upper line given by the poverty line that one would expect given the country’s level of average income.

• The true welfare-consistent absolute line lies somewhere between the two bounds.

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We can also measure our success at leaving no-

one behind

• The floor is not all we care about, but we cannot continue to ignore it in monitoring poverty.

• Our success in assuring that no-one is left behind can be readily monitored from existing data sources under certain assumptions.

• That would also assure more consistency between how we monitor poverty and how we think about social protection policies.

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Thank you for your attention!

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