Presentation at WIDER 30 th annual conference, Helsinki, September 2015 Toward Better Global Poverty Measures Martin Ravallion Georgetown University 1
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. 2
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) 4
Why do we see higher (real) poverty lines in richer countries? National poverty line ($PPP per day per person) 50 40 Luxembourg 30 20 USA 10 0 0.0 0.5 1.0 1.5 2.0 2.5 3.0 3.5 4.0 4.5 5.0 Log private consumption per capita ($PPP per day) 5
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. But we do not know which is right! 6
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. 7
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. 8
Lower bound + upper bound Z ( M it ) $1.25 (lower bound) Z( M it ) $1.25 max[ M $1.25, Poverty line ( day; 2005 PP it 0]/ 2 (upper) Slope=1/2 Upper bound $1.25/day $1.25/2 Excellent fit with data on national lines 9
Poverty measures for the developing world 70 Headcount index (% below poverty line) 60 50 Upper bound: absolute + relative 40 30 20 10 Rising proportion of relatively poor: 80% of the relatively poor in 1981 were absolutely poor, but by 2008 the proportion had fallen to under half. Lower bound: absolute poverty 0 1980 1984 1988 1992 1996 2000 2004 2008 2012 10
3000 2500 2000 Number of poor in millions Numbers of poor Relatively poor but not absolutely poor Upper bound 1500 1000 Absolutely poor Lower bound 500 0 1981 1984 1987 1990 1993 1996 1999 2002 2005 2008 Two-thirds of the increase in the number of people who are relatively poor but not absolutely poor is accountable to the decrease in the number of absolutely poor. 11
Monitoring progress in assuring that no one is left behind The 2013 U.N. report on setting new development goals argued that: the indicators that track them should be disaggregated to ensure no one is left behind. 12
New trajectory for average household consumption in the new millennium 6 Mean consumption per person ($ per person per day) (Developing world) 5 4 3 2 1 0 1980 1984 1988 1992 1996 2000 2004 2008 2012 Were the poorest left behind? 13
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. 14
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 => 15
Reduction in the incidence of absolute 80 poverty Percentage living below each line 70 60 50 40 30 20 10 0 1980 1984 1988 1992 1996 2000 2004 2008 2012 Note: All in 2005 prices at purchasing power parity $2.00 $1.25 $1.00 $0.87 $0.77 $0.67 $0.50 16
How can we understand these conflicting views? 17
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) 18
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). 19
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 19 th 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 21
Same reduction in the poverty count but different implications for the poorest Cumulative % of population Cumulative % of population Rising floor Floor stays put Poverty line Poorest left behind Measure of welfare Poverty line Measure of welfare Same reduction in the incidence of poverty but without leaving the poorest behind 22
How can the floor be estimated? 23
We cannot be sure that the lowest consumption in a survey is the floor Identifying the floor as the strict lower bound of the empirical distribution 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. 24
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: min * * * E( y y) y (1 SPG / PG ) SPG and PG are the Foster-Greer-Thorbecke measures. 25
Focusing on the floor gives a very different picture to the counting approach 26
Estimated mean floor = $0.67 a day With y * = $1.25, E( y min y) $0.67 (averaging all years) 95% confidence interval: ($0.47, $0.87). This is remarkably close to Lindgren s (2015) (independent) estimate of the cost of a barebones basket of food items. Slow growth in the floor at 0.4% per annum And unresponsive to growth in the overall mean consumption. 27
Much less progress in raising the consumption floor 6 Mean consumption ($ per person per day) 5 4 Overall mean for developing world 3 2 No sign that the new Millennium raised the floor 1 $0.67 on average Consumption floor: expected level of lowest consumption 0 1980 1984 1988 1992 1996 2000 2004 2008 2012 28
Yes, the poorest have been left behind! Fewer people living near the floor, but little change in the floor Absolute gain 1981-2011 ($ per person per day) 12 10 8 6 4 2 0 Percent of the population 100 1981 80 60 2011 40 20 0-20 Difference (2011-1981) -40 0 2 4 6 8 10 12 14 16 18 20 Consumption or income per person ($ per day, 2005 prices) 0 10 20 30 40 50 60 70 80 90 100 Percentile 29
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. 30
Conclusions: Two additions to the dashboard of poverty indicators 31
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. 32
We can also measure our success at leaving noone 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. 33
Thank you for your attention! 34