A weakly relative poverty line for South Africa

Similar documents
Benchmarking Global Poverty Reduction

Comment on Counting the World s Poor, by Angus Deaton

Poverty: Analysis of the NIDS Wave 1 Dataset

An Overview of the New Supplemental Poverty Measure

Keeping Up with the Joneses Preferences: Asset Pricing Considerations

Toward better global poverty measures. Martin Ravallion. The Journal of Economic Inequality. ISSN Volume 14 Number 2

Institutional information. Concepts and definitions

Development Economics. Lecture 16: Poverty Professor Anant Nyshadham EC 2273

How clear are relative poverty measures to the common public?

QUESTIONNAIRE A I. MULTIPLE CHOICE QUESTIONS (4 points each)

WEEK 7 INCOME DISTRIBUTION & QUALITY OF LIFE

Will Growth eradicate poverty?

Does Raising the Minimum Wage Help the Poor?

Regional Tripartite Meeting on Wage Policies in the Arab Countries

Chapter 19: Compensating and Equivalent Variations

A Measured Approach to Ending Poverty and Boosting Shared Prosperity Concepts, Data, and the Twin Goals

A Simple Model of Bank Employee Compensation

Open Working Group on Sustainable Development Goals. Statistical Note on Poverty Eradication 1. (Updated draft, as of 12 February 2014)

3 Arbitrage pricing theory in discrete time.

Poverty measurement: the World Bank approach

Poverty Statistics. Presentation of World Bank Report 49 th Session of the UN Statistical Commission

Inflation in a time of inequality: Assessing the relevance of cost of living measures for the poor

Income Distribution Database (

Estimating the Distortionary Costs of Income Taxation in New Zealand

ECON 450 Development Economics

What is So Bad About Inequality? What Can Be Done to Reduce It? Todaro and Smith, Chapter 5 (11th edition)

Pharmaceutical Patenting in Developing Countries and R&D

Societal Poverty: A Relative and Relevant Measure. Dean Jolliffe & Espen Beer Prydz* May 16, 2017

Maximizing the expected net future value as an alternative strategy to gamma discounting

Government Spending in a Simple Model of Endogenous Growth

GAINS FROM TRADE IN NEW TRADE MODELS

Chapter 11 of Macroeconomics, Olivier Blanchard and David R. Johnson

Intangible Capital: Complement or Substitute in the Creation of Public Goods?

The Links between Income Distribution and Poverty Reduction in Britain

QUESTIONNAIRE A I. MULTIPLE CHOICE QUESTIONS (2 points each)

Has Australian Economic Growth Been Good for the Poor? Melbourne Institute & Brotherhood of St Laurence. NERO Meeting, OECD.

EVIDENCE ON INEQUALITY AND THE NEED FOR A MORE PROGRESSIVE TAX SYSTEM

METHODOLOGICAL ISSUES IN POVERTY RESEARCH

Topic 3: Endogenous Technology & Cross-Country Evidence

Basic Income - With or Without Bismarckian Social Insurance?

HOW DID THE WORLD S POOREST FARE IN THE 1990s?

TRENDS IN INCOME DISTRIBUTION

1 Asset Pricing: Replicating portfolios

The misplaced debate about job loss and a $15 minimum wage

There is poverty convergence

Growth and Poverty Revisited from a Multidimensional Perspective

Indicator 1.2.1: Proportion of population living below the national poverty line, by sex and age

Export Import Price Index Manual 24. Measuring the Effects of Changes in the Terms of Trade

Comments on Michael Woodford, Globalization and Monetary Control

Asian Development Bank Institute. ADBI Working Paper Series

Derivative Instruments

1 Asset Pricing: Bonds vs Stocks

14.54 International Trade Lecture 3: Preferences and Demand

Department of Economics Queen s University. ECON239: Development Economics Professor: Huw Lloyd-Ellis

Comments on Jeffrey Frankel, Commodity Prices and Monetary Policy by Lars Svensson

Associate reading: Krugman-Obstfeld chapter 15 p , p

Initiative for Policy Dialogue Working Paper Series

Problem Set (1 p) (1) 1 (100)

Poverty, Inequality, and Development

Public economics: Inequality and Poverty

Globalization and the Feminization of Poverty within Tradable and Non-Tradable Economic Activities

POVERTY ANALYSIS IN MONTENEGRO IN 2013

Public Economics: Poverty and Inequality

Can pro-growth policies lift all boats? An analysis based on household disposable incomes

18.440: Lecture 32 Strong law of large numbers and Jensen s inequality

PART 4 - ARMENIA: SUBJECTIVE POVERTY IN 2006

Simple Notes on the ISLM Model (The Mundell-Fleming Model)

Risk & Sustainable Management Group

ECON 803: MICROECONOMIC THEORY II Arthur J. Robson Fall 2016 Assignment 9 (due in class on November 22)

Problem Set VI: Edgeworth Box

Spending and Growth A response to David Laws. David Howarth

The distributional impact of the crisis in Greece

I. The Solow model. Dynamic Macroeconomic Analysis. Universidad Autónoma de Madrid. September 2015

On Analysing the World Distribution of Income

Coupled with firm subsidies, a minimum wage is not that bad. Alain Trannoy (AMSE and EHESS) 4 th Labor AMSE & Banque de France workshop

I. The Solow model. Dynamic Macroeconomic Analysis. Universidad Autónoma de Madrid. Autumn 2014

Inequality in China: Recent Trends. Terry Sicular (University of Western Ontario)

GPP 501 Microeconomic Analysis for Public Policy Fall 2017

(welly, 2018)

2017/08 DP. Benoit Decerf, Karel Van den Bosch and Tim Goedemé. A new measure of income poverty for Europe

Review for Quiz #2 Revised: October 31, 2015

Inequality, poverty and the crisis in Greece

The Moldovan experience in the measurement of inequalities

Regret Minimization and Security Strategies

International Trade: Lecture 3

Chapter 11 International Trade and Economic Development

PhD Qualifier Examination

DOES ECONOMIC GROWTH REDUCE POVERTY? Technical Paper

ECON Micro Foundations

Income Inequality and Poverty

CHAPTER 2 FOUNDATIONS OF MODERN TRADE THEORY: COMPARATIVE ADVANTAGE

On Analyzing the World Distribution of Income

Introduction to the Special Issue on Global Poverty Lines

Comment Does the economics of moral hazard need to be revisited? A comment on the paper by John Nyman

SAVING-INVESTMENT CORRELATION. Introduction. Even though financial markets today show a high degree of integration, with large amounts

LECTURE 3 NEO-CLASSICAL AND NEW GROWTH THEORY

The Next Generation of the Penn World Table

Revisiting the Poverty Trend in Rwanda

ECON 256: Poverty, Growth & Inequality. Jack Rossbach

I. The Solow model. Dynamic Macroeconomic Analysis. Universidad Autónoma de Madrid. Autumn 2014

Transcription:

A weakly relative poverty line for South Africa APPLYING CHEN AND RAVALLION (2012) TO THE SOUTH AFRICAN CASE J O S H B U D L E N D E R M U R R A Y L E I B B R A N D T I N G R I D W O O L A R D S A L D R U, U C T

Absolute poverty lines in the developing world At country level: developing countries typically use poverty lines that aim to have the same real value at different dates and places. At the global level, the World Bank s widely-used $1-a-day line is absolute in that it aims to have the same purchasing power in different countries and at different dates.

Relative poverty in the developed world The more common practice in most OECD countries and Eurostat has been to set the poverty line as a constant proportion - typically 40-60% - of the (date and country-specific) mean or median income: Z i = km i Z i = poverty line for country i; M i = mean income for country i; 0 < k < 1 This is a strongly relative poverty line

Two justifications for a relative approach 1. Welfarist argument people gain utility from their income relative to the mean or median income of their country. 1. Capabilities argument poverty lines should allow for differences in the cost of social inclusion.

Social inclusion costs Idea that socially specific expenditures can be necessary for social inclusion is very long-standing e.g. Adam Smith: A linen shirt, for example, is, strictly speaking, not a necessary of life. The Greeks and Romans lived, I suppose, very comfortably though they had no linen. But in the present times, through the greater part of Europe, a creditable day-labourer would be ashamed to appear in public without a linen shirt, the want of which would be supposed to denote that disgraceful degree of poverty which, it is presumed, nobody can well fall into without extreme bad conduct.

Ravallion and Chen s critiques of strongly relative lines Do not allow for poverty reduction from distributionneutral growth Welfarist justification claims that people attach value to their income relative to the mean but it is implausible that people only care about relative position Capabilities justification it is implausible that the cost of social inclusion goes to zero in the limit (i.e. it is surely bounded below) Elasticity of the relative poverty line to mean income is therefore a key concern for Ravallion and Chen

The Weak Relativity Axiom Hence they propose that poverty measures should follow their Weak relativity axiom (WRA): If all incomes increase (decrease) by the same proportion then the aggregate poverty measure must fall (rise). This is satisfied for standard poverty measures so long as the elasticity of the line to mean income is <1. Allows for RD and social inclusion costs, but imposes a limit on the weight attached to such effects As we see over the next few slides

WRA and the welfarist approach Welfare is dependent on own income and relative income: W = W Y, Y M (1) Y = own income; M = mean income Poverty line Z is implicitly defined by: W = W Z, Z M (2) where W is the poverty line in welfare space (the poverty line is absolute in welfare space)

Atkinson and Bourguignon capabilities approach Atkinson and Bourguignon (AB) create a poverty line which makes provision for 2 capabilities: physical survival, and social inclusion. Each capability has corresponding poverty line, and a person is non-poor only if they have the means to satisfy both capabilities Z i AB = max Z, km i 0 < k < 1 (3) Z = minimum expenditure for physical survival; km i = social inclusion cost for country i, where k is some constant and M i = mean income

Ravallion and Chen critique of AB Using original database of international poverty lines used to create Dollar-a-day measure, AB calculate k=0.37 BUT this measure still creates a poverty line which is unit elastic with respect to mean income when M i > Z Suggests that cost of social inclusion is directly proportional to mean income. Implies that in the limit as mean income approaches zero, cost of social inclusion vanishes Ravallion and Chen argue that this is implausible even people in very poor societies will have social inclusion costs They also argue that it is undesirable to have a poverty line which does not allow inequality-neutral growth to reduce poverty k

Ravallion and Chen generalised AB line So they create Generalized AB poverty line which has a minimum cost of social inclusion and a varying elasticity to mean income Z i = max Z, α + km i α 0 (4) α = lower bound to social inclusion needs Note: elasticity of Z i to M i is now strictly less than 1 for α > 0, and will tend to 1 in the limit as M i goes to infinity

Welfarist interpretation of generalised AB line W = Y if M M Z α k (5a) = Y 1 k M M Y if M > M (5b) Concerns about relative deprivation emerge only when mean income is above some critical value, and above that the utility from own consumption is discounted according to the degree of relative deprivation

Calibrating this equation to the empirical relationship Like AB, Ravallion and Chen set Z = $1.25-a-day as a lower bound for physical survival When calibrating the weakly relative line, there are two approaches: 1. Relate national poverty line to private consumption expenditure from National Accounts (initial 2011 paper) 2. Relate national poverty lines to mean consumption calculated from survey data (Chen and Ravallion 2012 revision) Values for k and α change depending on method

Calibrated lines Calibrated with national accounts (NA) data (Ravallion and Chen 2011): Z i = max 1.25, 0.60 + M i 3 (6) Calibrated with survey data (Chen and Ravallion 2012): Z i = max 1.25, 1.25 2 + M i 2 (7) Unit: 2005 PPP dollars, per day

Application to South Africa Values of Z and α PPP for individual consumption from 2005 round of International Comparison Program (ICP) of the World Bank (the round that Ravallion and Chen use for their estimates) $1 = R4.57 in 2005; $1.25 = R5.71 Update by headline CPI inflation when necessary Value of M: Mean consumption expenditure (constant 2011 monthly Rands) 2005 2011 real change National Accounts (SARB) 2596 2900 11.7% Survey Data (IES) 1854 2123 14.5%

SA lines 2005 and 2011 NA method (SARB data) Z t = max 255, 122 + M t 3 Z 2005 = R988 Z 2011 = R1089 Survey method (using IES) Z t = max 255, 127 + M t 2 Z 2005 = R1054 Z 2011 = R1189 Units: constant 2011 monthly ZAR

Comparison to SA absolute poverty lines Comparison with upper-lines (constant 2011 monthly Rands) Poverty line 2005 2011 StatsSA 2015 upper 779 SALDRU upper 998 Ozler upper 1164 Weakly relative (NA) 988 1089 (10% real change) Weakly relative (survey) 1054 1189 (13% real change) Comparison with food-lines (2011 Rands) Poverty line 2011 StatsSA 2015 food 335 SALDRU food 327 Ozler food 480 $1-a-day 255

Head-count ratios 2005-2011 Using NA-derived lines Poverty line 2005 2011 $1.25-a-day 14.1% 10.3% Relative poverty 65.7% 61.1% Constant 2005 line 65.7% 58.0% Using survey-derived lines Poverty line 2005 2011 $1.25-a-day 14.1% 10.3% Relative poverty 67.5% 63.6% Constant 2005 line 67.5% 60.1%

A useful measure for South Africa? Strong theoretical arguments for considering a relative poverty line Examination of how mean income relates to national poverty lines is an appealing method for examining how perceptions of what constitutes poverty are related to mean income Useful to have a relative poverty measure which still allows distribution-neutral growth to reduce poverty, especially for South Africa. Also seems to be little theoretical reason to accept prevailing relative lines assumption of direct proportionality to income Varying elasticity of poverty line to mean income is perhaps appealing, given some of the evidence. Also seems to be little reason to accept the alternative, of constant elasticity across different countries Does seem somewhat similar to local absolute lines, which implicitly contain ideas about what poverty means in SA

Some theoretical concerns Ravallion and Chen argument for a minimum cost to social inclusion needs is not satisfying: While one can agree that certain goods have a social role, it is hard to accept that the expenditure required to attain those goods is negligibly small for very poor people. Recalling Adam Smith s example of the role of a linen shirt in eighteenthcentury Europe, a socially adequate shirt would not presumably have cost any less to the poorest person than the richest. Generalized AB line assumes that where M < Z α, there is no k concern for either RD or social inclusion costs (unless Z* includes social inclusion costs, but still assumed constant). Why should elasticity=0, rather than just being low? [equations 5a and 5b above]

A few other concerns Survey method: may be spurious relationship between poverty line level and mean consumption when same survey is often used to calculate poverty line and mean income Also not clear how well the survey version fits the data NA method: with differences between NA and survey estimates of consumption, may be inappropriate to use NA data to set poverty lines, and survey data to measure poverty using those lines Empirical implementation assumes that our global weakly relative poverty lines change over time consistently with the cross-sectional variation seen between countries