Analysing poverty Using quantitative methods to draw ‘the poverty line’ Simon Oakes Philip Allan Publishers © 2016

Presentation outline Definitions of poverty. An overview of global patterns and trends in absolute poverty. The implications of changing how absolute poverty is measured. The issue of relative poverty. Making use of mean data and the Gini Coefficient. An overview of patterns and trends in relative poverty. Philip Allan Publishers © 2016

Definitions of poverty Absolute povertyExtreme deprivation, generally measured in terms of living below the $1.25 a day poverty line. Absolute poverty applies to all countries and does not change with time. Purchasing power parity (PPP) Income can be converted into equivalent PPP$ which have the same buying power in different countries. So PPP$1 in Malaysia will purchase the same goods and services as PPP$1 in Mali or Monaco. This allows comparison of relative income between countries. Relative povertyPoverty defined in terms of the prevailing conditions in a country at a particular time. It is often calculated against the median income. Relative poverty varies between countries and changes over time. Philip Allan Publishers © 2016 Do you know what these terms mean? Click to reveal the definitions Do you know what these terms mean? Click to reveal the definitions

Patterns and trends in absolute poverty Philip Allan Publishers © 2016 Per cent of the population below the $1.25 poverty line (PPP) for selected southeast Asian countries, 1990s and 2010 Using the US$1.25 measure, we can see that poverty has fallen markedly throughout much of Asia. In China (not shown), nearly half a billion people have escaped poverty. Progress in sub- Saharan Africa has been slower, however.

Patterns and trends in absolute poverty Average incomes have risen in all continents since 1950, but only very slowly in the poorest parts of Africa. Many countries have advanced from low- income to middle-income status since the 1970s, resulting in a ‘three-speed’ world of developed, emerging and developing economies. As a result, absolute poverty has fallen worldwide – but this statement hides the problem some countries still face. By 2030, US$1.25 poverty could largely be eradicated in Asia (see table). Philip Allan Publishers © 2016 Extreme poverty (below $1.25 a day) in developing Asia, 1981– 2030

What happens if the poverty line is changed? The scale of world poverty depends on what income value statisticians choose. Views differ on whether US$1.25 is the best benchmark. The line was increased from US$1.00 to US$1.25 in 2008 due to the changing value of the dollar. This also resulted in an additional 400 million people in the developing world becoming classified as ‘extremely poor’. In recent years, the World Bank has proposed a new poverty line closer to US$2.00. Philip Allan Publishers © 2016 ‘You’ve got a line that no one knows where to put it, PPPs that change, and underlying data that is bad... It is sort of a statistical problem from hell.’ Angus Deaton, Princeton economist and critic of the current poverty line ‘You’ve got a line that no one knows where to put it, PPPs that change, and underlying data that is bad... It is sort of a statistical problem from hell.’ Angus Deaton, Princeton economist and critic of the current poverty line ‘We are talking about a very dense population of people right near the poverty line. So little shifts in the poverty line result in millions of people falling into, or rising out of, poverty.’ Peter Lanjouw, former head of World Bank poverty research unit ‘We are talking about a very dense population of people right near the poverty line. So little shifts in the poverty line result in millions of people falling into, or rising out of, poverty.’ Peter Lanjouw, former head of World Bank poverty research unit

What happens if the poverty line is changed? Philip Allan Publishers © 2016 Views differ on how much money is needed to escape absolute poverty. In 2011, the World Bank proposed raising the poverty line from US$1.25 a day measure to US$1.78 a day. The higher value increases the number of people in extreme poverty worldwide by almost a third.

What happens if the poverty line is changed? In 2015, the World Bank changed the poverty line from US$1.25 to US$1.90 per day. This ‘rebasing’ of the old line took place in order to adjust for depreciation in the purchasing power of the dollar (rather than a re-think of how much money people need). Find out more about this change at: bank-extreme-poverty-to-fall-below-10-of-world-population-for-first-timehttp:// bank-extreme-poverty-to-fall-below-10-of-world-population-for-first-time Philip Allan Publishers © 2016 ’A poverty line that is constant in real terms in poor countries, is now higher in US dollars. US$1.90 in 2011 buys approximately the same things as US$1.25 did in 2005 in poor countries... That the value is higher in US dollar terms is merely a reflection of a weaker dollar in purchasing power parity (PPP) terms!’ Francisco Ferreira, World Bank Chief Economist ’A poverty line that is constant in real terms in poor countries, is now higher in US dollars. US$1.90 in 2011 buys approximately the same things as US$1.25 did in 2005 in poor countries... That the value is higher in US dollar terms is merely a reflection of a weaker dollar in purchasing power parity (PPP) terms!’ Francisco Ferreira, World Bank Chief Economist

How are patterns of relative poverty changing? According to the US$1.25 measurement, absolute poverty has been halved globally since the introduction of the Millennium Development Goals in 2000, with the greatest progress made in Asia. But the number of people living in relative poverty has risen in many societies during the same time period. When the assets and earnings of the hyper-rich balloon in value, the average (per capita) level of wealth rises. As a result, some poorer people — whose earnings are static or have risen modestly — are reclassified as having below-average incomes despite the fact they have experienced no material decline in wealth. In China, India and Indonesia especially, the majority of people are economically worse-off than ever before in relation to the richest members of society — even if that same majority are generally better-off than previous generations when income is measured in real terms. We live in a world where, often, the rich get richer while the very poorest do not. As a result, relative poverty has risen in many places because the data are derived from mean income levels. Can you see why this is the case? Philip Allan Publishers © 2016

How are patterns of relative poverty changing? Philip Allan Publishers © 2016 Growth incidence of expenditure by quintile, Indonesia and Lao PDR (annual growth of mean per capita expenditure by quintile) The mean spending power increase in both countries looks impressive. However, 80% of people in both countries have experienced below- mean growth: look closely at how the richest quintile have driven growth overall.

How are patterns of relative poverty changing? Philip Allan Publishers © 2016 In the USA, there is now enormous income inequality. Relative poverty is defined as a ‘three-person household earning less than $31,402 a year’. There are now 49 m adults in this bracket in the USA, up from 43 m in Household income in the USA, 2014 (US$)

The Gini coefficient Philip Allan Publishers © 2016 HDI rank GDP per capita (nominal, US$, 2014) Share of national income going to poorest fifth of population (%) Share of national income going to richest tenth of population (%) Gini coefficient High HDI 12 Sweden49, UK46, Medium HDI 91 China7, Indonesia3, India1, Low HDI 180 Uganda Burundi Gini coefficient is a number between 0 and 100. The higher the value, the greater the degree of income inequality. A value of 0 suggests that everyone has the same income whereas as value of 100 would mean a single individual receives all of a country’s income. Task: Describe the pattern of inequality shown by the Gini coefficient data.

Poverty and inequality facts The findings of the World Bank’s Poverty Unit report provided a useful snapshot of the world in Here are just some of its findings. The world’s rich countries still account for 50% of global GDP while containing only 17% of the world’s population. Low income economies account for only 1.5% of the global economy, but nearly 11% of the world population. Roughly 28% of the world’s population lives in economies with GDP per capita expenditures above the US$13,460 world average and 72% in economies that are below average. Six of the world’s 12 largest economies are in the middle-income category. When combined, the 12 largest economies account for two-thirds of the world economy, and 59% of the world population. The four most expensive countries to live in are Switzerland, Norway, Bermuda and Australia, with the cheapest being Egypt, Pakistan, Myanmar and Ethiopia. Philip Allan Publishers © 2016

Further research Philip Allan Publishers © 2016 The World Bank’s poverty home page with the latest news and commentaries from a key mainstream institution: The entry portal to the World Bank’s poverty data, where you can select countries, regions and time periods, and generate maps and graphs: The international NGO Oxfam provides an alternative voice about poverty and its causes:

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