Comments on Shaohua Chen Global Poverty Measures: The 2015 World Bank Poverty Update

Comments on Shaohua Chen Global Poverty Measures: The 2015 World Bank Poverty Update November 2, 2015 Yasuyuki Sawada University of Tokyo 1

Outline Celebrated World Bank poverty data Poverty measurement: A primer Comments 1. Inflation vs calorie intake adjustments 2. Distribution and stochastic dominance 3. Poverty dynamics 4. Policy implications 2

Celebrated World Bank Poverty Data With PovcalNet, the Bank s official global poverty measures are computed using poverty lines of $1.25 or $2 a day, the former providing poverty estimates for the first MDGs (and target #1) to halve the 1990 poverty rate by 2015. 4

Celebrated World Bank Poverty Data The first SDGs, Target 1.1: By 2030, eradicate extreme poverty for all people everywhere, currently measured as people living on less than $1.25 a day. Will it be changed to $1.90? 5

Celebrated World Bank Poverty Data In the early 1980s, the Bank was contemplating a major effort in collecting household survey data the Living Standards Measurement Study (LSMS). Deaton played an important role in this endeavor,. He was also instrumental in ensuring that expenditure data were collected as the basis for welfare measurement. Consumption as opposed to income remains the core variable in poverty measurement in low-income countries. 6

Measuring Poverty How can we set poverty line? (Absolute) poverty lines: The cost of basic food needs (i.e., the cost a nutritional basket considered minimal for the healthy survival of a typical family), to which a provision is added for non-food needs. I. The food-energy intake method: by finding the consumption expenditures or income level at which a person s typical food energy intake is just sufficient to meet a predetermined food energy requirement. II. The Cost of Basic Needs method: values an explicit bundle of foods typically consumed by the poor at local prices first. To this, a specific allowance for nonfood goods, consistent with spending by the poor, is added. 8

Measuring Poverty How can we convert poverty line in Indian RP to the line in USD? PPP attempts to measure the actual value of a currency in terms of its ability to purchase similar products. With US price level, P US, and India s price level, P India, PPP RP/USD is an exchange rate (RP per USD) which satisfies: PPP RP/USD P US = P india Rearranging terms, you see that PPP is relative purchasing power of two currencies: PPP RP/USD = P India /P USD = (1 USD/P US ) /(1RP/P India ) 9

Measuring Poverty PPP is desirable because of Balassa=Samuelson effect: There is a systematic relationship between the level of development and the deviation of nominal exchange rate, E, from PPP RP/USD = P India /P USD. The Balassa= Samuelson effect 2 PPP/E 1 PPP RP/USD < E RP/USD 0 0 5000 10000 15000 20000 25000 30000 35000 Per capita real GDP (in 1994) 10

Measuring Poverty Why $1.25 a day poverty line? 11

Measuring Poverty 12

Measuring Poverty Head count ratio (or incidence of poverty): proportion of people whose income is less than poverty line, Z C = consumption or income f(c) = density function P(0) f(c) 0 Z C 13

Measuring Poverty 14

Comment #1 In 2015 poverty line, same national lines as 2008 were used. Yet, people are eating less than before - especially in places like India, where there has been a decline in per capita calorie consumption. Opposite adjustments needed? Source) Angus Deaton, Jean Drèze (2009), Food and Nutrition in India: Facts and Interpretations, Economic & Political Weekly February 14, 2009 vol xliv No 7. 16

Comment #2 Importance of the whole distribution changes. Can PovcalNet provide the following information? Emergence of middle class Top income a la Piketty Poverty line free poverty index using concepts of stochastic dominance? 18

Comment #2 Emergence of the Middle Class defined by a group of people with per capita income between USD10 and USD100 per day Data) Kharas, Homi (2011) The Emerging Middle Class in Developing Countries, Brookings Institution. 19

Thomas Piketty Comment #2 http://www.msz.co.jp/book/detail/07876.html 20 http://topincomes.parisschoolofeconomics.eu/

Comment #2 Stochastic dominance 21

Comment #3 While static poverty may not increase much with the new $1.90 poverty line, extent of chronic vs transient poverty may change significantly? 23

Exit time and the MDG target #1 Comment #4 While static poverty may not change much with the new $1.90 poverty line, required speed of income growth to achieve the target or time to exit poverty may change significantly? How can we estimate the required growth rate by country? We can apply the concept of exit time. Exit time is given by the time a person i with income y i below poverty line z will exit the poverty situation [Morduch (1998)]. The variable g i denotes income growth rate of the person i: t i ln( z) ln( yi ) ln(1 g ) i With the median income of the poor, μ m, Morduch (1998) showed that the time (years) to halve number of the poor can be computed by: t m i ln( z) ln( ) ln(1 g m ) m 25

Comment #4 While static poverty may not change much with the new $1.90 poverty line, required speed of income growth to achieve the target may change significantly? 26