What Should You Read to Get a Better Sense of Poverty Line Estimates?

Ali, an FYMSc student at GIPE reached out with a couple of questions about poverty line estimates – their nature, are they adjusted for inflation, etc. That was in response to my post about the tricky nature of poverty lines. Ali’s comment is towards the bottom of that post.

Here’s my list of things to read in order to understand the concept of poverty lines better:

First, the World Bank itself:

Q: What is the new poverty line, and based on this new measure, how many people are living in extreme poverty in the world?
A: The new global poverty line is set at $1.90 using 2011 prices. Just over 900 million people globally lived under this line in 2012 (based on the latest available data), and we project that in 2015, just over 700 million are living in extreme poverty.
Q: Why raise the poverty line? What was wrong with the $1.25 a day line that we are all used to?
A: As differences in the cost of living across the world evolve, the global poverty line has to be periodically updated to reflect these changes. The new global poverty line uses updated price data to paint a more accurate picture of the costs of basic food, clothing, and shelter needs around the world. In other words, the real value of $1.90 in today’s prices is the same as $1.25 was in 2005.

https://www.worldbank.org/en/topic/poverty/brief/global-poverty-line-faq

That answer’s at least one of Ali’s questions – the poverty line is indeed updated to account for inflation. But keep in mind that indices are tricky little devils at the best of times. When it comes to measuring inflation, particularly for a basket of goods that the poor are likely to consume across different countries over long time horizons, it is all but impossible.1 But still, to the extent possible, poverty lines are adjusted for inflation.

But Lant Pritchett has his reservations:

There is no line at dollar a day in income dynamics. One might think a poverty line exists that demarcates a “poverty trap” and that people “in poverty” have a hard time escaping poverty—except that it doesn’t. All of the available evidence that tracks households over time finds enormous fluidity across the dollar a day threshold–and no evidence that it is harder to increase incomes from just below than just above—there is no line.

https://www.cgdev.org/blog/extreme-poverty-too-extreme

… and if you read the entire essay, it is hard to disagree with his point. He has an entire page on his website dedicated to talking about poverty lines, and the articles/videos deserve a closer look by any student of development economics.

I cheated a little bit while writing what I wrote above, because I wanted to give a chronological view of developments in the last decade or so. What’s written above is from 2013-14, and then this happened in 2017:

Starting this month, the World Bank will report poverty rates for all countries using two new international poverty lines: a lower middle-income International Poverty Line, set at $3.20/day; and an upper middle-income International Poverty Line, set at $5.50/day. This will be in addition to the $1.90 International Poverty Line – which remains our headline poverty threshold, and continues to define the Bank’s goal of ending global extreme poverty by 2030.

Let us be completely clear: The World Bank’s headline threshold to define extreme global poverty is unchanged, at $1.90/day. The Bank’s goal of ending poverty by 2030, and the United Nations Sustainable Development Goal 1.1, are both set with respect to this line. However – as Amartya Sen noted early on, and the Atkinson Commission reminded us – poverty is not a uniquely defined concept. There is an inevitable element of arbitrariness in choosing any poverty line, no matter how carefully it is constructed.

https://blogs.worldbank.org/developmenttalk/richer-array-international-poverty-lines

Here’s more from the World Bank, if you’re interested. And if it is data you’re after, try this.

Speaking of Amartya Sen, this paper is a classic, and a must read. Excerpting from this paper is difficult, please, read the whole thing.2

Before we get to India specific literature, a couple of see-also’s: the Wikipedia page on poverty thresholds (of course) and this lovely website that accompanies Martin Ravallion’s book.3


Now, about India specific work on poverty lines.

Here is a short summary by PRS India on the work on poverty lines in India.

Here is a useful survey paper on measuring poverty in India:

Poverty can be measured relatively, but a measure of absolute poverty is more useful for making cross-cultural comparisons. Unfortunately, the measurement of absolute poverty is difficult, because of inter-individual and intra-individual variations in minimum needs over time. As a result, simplistic assessment methods and confusion have marked many of the estimates of absolute poverty in less-developed countries. Using Indian material as an example, this paper attempts to trace the progress of the methodology; to explain how widely varying poverty estimates have come about; and to draw some tentative conclusions about the extent and pattern of absolute poverty in India today

Cutler, P. (1984). The measurement of poverty: A review of attempts to quantify the poor, with special reference to India. World Development12(11-12), 1119-1130.

Any GIPE student should know about Dandekar-Rath (part-II here), of course, but this paper goes a bit beyond, and is therefore a better introduction (in my opinion). Speaking of Dandekar, the original paper is worth reading, of course, but this is also an enjoyable read.

Finally, here is an excellent speech by Abhijit Banerjee on different (potential) ways to measure the poverty line.

And finally finally, also look up the FGT formula, and here are past posts on EFE that mention poverty lines.

  1. and with PPP considerations to boot![]
  2. If I had to excerpt something, the bicycle passage would have been my choice, but without context it is quite confusing.[]
  3. The explanation about the cover to the book alone is worth a click-through[]

India: Links for 14th October, 2019

  1. An interview with Amartya Sen.
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  2. Amazon is planning on entering the food delivery business in India. This ought to be fun.
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    ““We have disrupted every business we have entered, be it ecommerce, payments or entertainment,” a senior Amazon executive told Moneycontrol on condition of anonymity.The launch is slated to happen around Diwali at the end of this month.”
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  3. Let’s drop the pretense that India’s fiscal deficit is 3.5% of GDP. Let’s drop the target itself. And the article doesn’t say it, but I have always wondered, why divide by GDP in the first place?
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    “Even if these changes don’t deliver credible budgeting, there is no great virtue in stipulating that 3 per cent is the desired level of fiscal deficit at the Centre. As T.C.A. Srinivasa-Raghavan has argued more than once in these pages, that number was simply copied from the European figure, although the economic context for India is radically different from that in Europe.”
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  4. An analysis of Yes Bank.
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    “Yes Bank – The “Kohinoor” of Rana Kapoor has seen him exit in an unglamorous way. He had pledged the stock in favour of his daughters’ borrowings, and the lenders decided to selll. The stock fell 25% in a day, and hit a 10 year low at Rs 30.”
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  5. A short, and entirely positive review of Devendra Fadnavis’ tenure.

Links for 24th April, 2019

  1. “Really? When is the last time you ran a search with DuckDuckGo? Too often, he seems to be stretching the evidence. He argues that, given the social aspects of the workplace, “companies are actually responsible for some of our most important relationships.” But that’s a function of work — not of corporate life. People at nonprofits make friends, too. Cowen asserts in defense of Amazon, “My options as a book consumer never have been better.” He includes as evidence of a competitive book market the option (which he doesn’t condone) of “illegal downloads of free PDFs.” Jeff Bezos must rue such defenders. (Bezos founded Amazon and owns The Washington Post.)”
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    Roger Lowenstein reviews Tyler Cowen’s latest book. I myself have not read it yet, but the review was interesting to me, in particular this excerpt about illegal PDF’s and how they encourage competition.
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  2. “Alwyn’s related analysis of published studies is even more striking. He shows that, in a sample of 1359 IV regressions in 31 papers published in the journals of the American Economic Association,
    “… statistically significant IV results generally depend upon only one or two observations or clusters, excluded instruments often appear to be irrelevant, there is little statistical evidence that OLS is actually substantively biased, and IV confidence intervals almost always include OLS point estimates.” ”
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    Econometric nerds/students only (consider yourself warned) – but IV isn’t as great as it is made out to be. Occam’s razor is massively ignored in econometrics.
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  3. “The Fiscal Affairs Department and the Institute for Capacity Development of the IMF are pleased to announce that the online course on Public Financial Management (PFM) will relaunch on May 1, 2019 and remain open year-round. In its two previous offerings, this free online course has been taken by more than 2,200 participants in 194 countries, with very high satisfaction rates. Taught by more than 15 experts of the Fiscal Affairs Department, the course is open for government officials, staff of bilateral and multilateral development agencies, civil society organizations, parliamentarians, academics and the general public. The course has been updated in 2019 to reflect the revisions brought to IMF’s PFM standards and tools and adopted in the last twelve months – namely the Public Investment Management Assessment (PIMA) framework and the Natural Resource Management pillar of the Fiscal Transparency Code (FTC).”
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    You might, as a student of economics or policy making, want to consider taking this course.
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  4. “So why, then, does the government tax, under the MMT view? Two big reasons: One, taxation gets people in the country to use the government-issued currency. Because they have to pay income taxes in dollars, Americans have a reason to earn dollars, spend dollars, and otherwise use dollars as opposed to, say, bitcoins or euros. Second, taxes are one tool governments can use to control inflation. They take money out of the economy, which keeps people from bidding up prices.And why does the government issue bonds? According to MMT, government-issued bonds aren’t strictly necessary. The US government could, instead of issuing $1 in Treasury bonds for every $1 in deficit spending, just create the money directly without issuing bonds.”
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    Yet another explainer of MMT – it’s counterintuitive (at least to me), and I’m still not sure it makes sense and will work – but I understand it better than I did before upon reading this article.
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  5. “This is an issue for economics too: the construction of the deflators used to turn nominal pound or dollar GDP into ‘real’ GDP, on which so much policy hangs, relies on a theory of constant, known preferences which determine the utility of consumption, and yet modern economic growth is all about creating wants for new goods and services for which preferences have to be created. So at a time of rapid innovation it is not at all clear what the deflators and ‘real’ GDP measures are measuring.”
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    Diane Coyle reviews a book that helps us understand Amartya Sen’s work better. I found this excerpt above quite interesting.