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[]

Three Excellent Games to Play (Econ related)

We’re running a small workshop on experimental and behavioral economics at the Gokhale Institute, and we had great fun playing these games yesterday.

  1. Bad News: a game that teaches you how (worryingly) easy it is to get addicted to generating, sharing and amplifying bad news. Yes, I know this isn’t news, exactly – but playing this game allows us to actively participate in the process. And like I said, what is worrying is the ease, and the addiction. Give it a shot, doesn’t take more than 10 minutes.
  2. Go Viral!: In similar vein, but more topical.

Both of these I found out about via Behavioral Scientist.

And the excellent, excellent, kiviq.us. I’ll be using this again and again in the years to come – a very simple, very hands-on way to help students understand double oral auctions.

Have fun – and please reach out if you need help running any of these games. I’d love to help out, if I can in any way.

Navin Kabra on Game Theory and Blockchain: Notes

Navin Kabra was on campus yesterday, to talk about blockchain. More specifically, game theoretic aspects of blockchain. The talk was excellent throughout, and lasted well beyond the scheduled 90 minutes (and I mean that as a compliment!)

What follows are my key takeaways of the talk (although I have cheated just a little bit):

Introduction

  • Navin began the talk with a brief summary of the prisoner’s dilemma, the Nash equilibrium, repeated games and iterative games
  • He briefly touched upon the surprising success of the tit-for-tat algorithm
  • He mentioned the Schelling point

The Use Case

  • He then got into the need for a technology such as blockchain. He used land records and trust issues from this area as a use case.
  • When I buy land, or an apartment, from somebody, the following issues emerge:
    • How do I know that the land is yours to sell?
    • How do I know that you are you?
  • Of these, we focused more on the first one: how do I know that the land is yours to sell?
  • Without blockchain, the idea is to go to a centralized repository, and check who owns the land. If it is indeed the person who wants to sell you the land, great. If not, ask the prospective seller to buzz off.
  • But how do I make sure that the prospective seller is who she says she is?
  • One way to prevent this from happening is by using modern cryptography to digitally sign these land records. Navin didn’t mention this in his talk yesterday, but here’s one recommendation to learn more about this topic: The Code Book.
  • But what if the prospective seller has sold the land to somebody else, and gotten that transaction struck off the official record?
  • Enter blockchain

The Basic Idea

  • Take a block of transactions, and apply a seal to them. A digital seal, although the idea is the same as a mohar.
  • But that’s not enough: what we then do is also use an identifier for this block of transactions, that is generated in a unique, but random way, from the previous block of transactions (this is called a hash).
  • If somebody were to hack into this block of transactions and change something, it would therefore change the hash for the next block, rendering the next block untrustworthy.
  • This dependency works across the entire chain of blocks, hence “blockchain”.
  • Better still, this entire chain of blocks is not stored on one central server, but across many different servers – this is the distributed ledger concept.

The Distributed Ledger

  • So why would these different servers (or rather, their owners) want to be a part of this?
  • So here’s the incentive mechanism: servers solve an algorithm that isn’t difficult, but is time consuming. Whoever solves the next chunk of this algorithm gets to seal the next block, and alerts all other servers about having done so.
  • Once all servers get this alert, they all update the chain of blocks so that everybody has the same version of events. This, of course, happens automatically.
  • The server that sealed the latest block gets as reward: bitcoins.

Bitcoins

  • These bitcoins are, in essence, a reward mechanism for making blockchain work.
  • Once folks start trading these bitcoins, especially in exchange for stuff from the real world, the value of bitcoins goes up.
  • We didn’t explicitly speak about this yesterday, but here’s my understanding: It becomes, as with any other currency, a medium of exchange, and also a store of value. (The unit of account bit is more troublesome, and I won’t get into it right now)
  • That reward mechanism is randomized, in the sense that any computer/server is equally likely to crack the next chunk of the algorithm. The more computing power you have, over timethe more you will get a higher share of bitcoins.
  • The number of bitcoins that can be mined is limited, and the number that is released per chunk of algorithm solved may change as a function of the number of computers trying to compete. In other words, the incentive mechanism is built in (I was rather impressed with this)
  • There are ridiculously large buildings in China stocked to the roof with servers whose sole objective is to mine bitcoins.

Game Theoretic Aspects of Blockchain

  • This is as pure an experiment in game theory as one could hope for.
  • You have people, necessarily anonymized, who can’t communicate with each other, who are trying to mine bitcoins
  • Also, you have folks who are, again necessarily anonymized, trying to transact using bitcoins.
  • Should they cooperate with each other or not? What are the implications? Since I’m already at around 750 words right now, I’ll outsource this part. Do read it, it is a very good summary of both game theory as well as its application to blockchain.

Also…

  • I enjoyed the fact that the numbers 42 (check the last bullet point, especially. But also, see this), 1729 were used in the presentation. This had nothing to do with anything, but Easter Eggs are always fun.
  • Also, yesterday I learnt (is YIL a thing? It should be)
  • I (and I think I speak for all the students who were present yesterday) would love to learn more about applications of Bitcoin. If there are folks in Pune who would like to come talk about this at Gokhale Institute, please get in touch! ashish at econforeverybody dot com

 

Finally, a huge thank you to Navin! The talk was hugely informative, thought provoking and easy to understand – and that’s a very rare combination indeed.

Launching the One Book a Month Club @GIPE

Calling it a club is a bit of a misnomer, since it’s mandatory for the undergrad students at the Gokhale Institute, but it just sounds cooler.

One thing that we wanted to fit in (but couldn’t) for the undergraduate degree at Gokhale Institute was a Great Books program. In retrospect, that was a blessing in disguise, because it has given me the chance to launch this instead.

The One Book a Month program involves inviting one person a month to nominate a book that they think young folks absolutely must read. Said young folks read the book,  and write a five hundred word report on the book. At the end of the month, all of us – person, young folks and I – sit down and talk about the book. Rinse and repeat. There’s a competition, with rules, carrots and sticks – more details here.

But stripped of all the razzmatazz, it really is just an effort to get people to read more – which is kind of the whole point, no?

Amit Paranjape has very kindly agreed to kickstart proceedings, and his book of choice for this month is Sapiens, by Yuval Noah Harari. I’ll share the date on which we’ll have the talk with Amit – if you happen to be in town, and are interested in attending the talk, you’re most welcome! We’ll also be putting up the discussion itself on YouTube and on a podcast based on this series – links to those will also be made available.

If you have book suggestions, guest suggestions, or other suggestions about how this series could be made better, I’m all ears! Drop me a mail at ashish at the rate econforeverybody dot com.

Lunch With FT: Richard Thaler

“One thing for sure is Remain is a horrible name. It’s weak. Whereas Leave is strong.”

Richard Thaler is by now a household name – well, I think so at any rate, and this interview that he gave to Tim Harford (who should be a household name!) is worth reading in its entirety. You’ll need to sign in/register, I think – sorry about that.

Quick update: we’re conducting a workshop on behavioral economics for undergrad students at GIPE this week, and I’ll post nuggets such as these along the way.

A five part series on behavioral economics

This week’s posts were going to be about podcasts that I listen to, but I’ll push that out to next week.

I and a colleague of mine at the Gokhale Institute (which is where I work) are running a five day seminar at the Institute on behavioral economics. This one is for undergraduate students only, but based on how this one turns out, we might do a couple more through the year. But for that reason, I figured we might take a look at behavioral economics is, and explore work being done in this area, and why it matters.

In this post, I’ll give you an overview of behavioral economics, and in the five subsequent posts that follow, I’ll detail what we spoke about in each session.

First things first: behavioral economics really is a tautology, because economics is the study of choice, and we make our choices given what we know and given what we feel.

The trouble is, modern economic theory (most, but not all of it) would tend to say that what we feel ought not to matter, and in fact doesn’t actually matter in the real world. Except we’ve all demolished a big fat bowl of ice-cream because we’re feeling blue, the diet be damned. We’ve all bought items on sale on Amazon, when we clearly had no need for them. And we’ve all chosen to play a game on the phone over completing a task at hand, and hang the consequences. I could go on (and not just where individuals are concerned, but firms and governments too!), but you get the picture.

We’re all predictably irrational.

In a sense, behavioral economics is about the first word in that link. As a social scientist, it’s not much use to say that we’re irrational. That’s akin to saying that there’s nothing that we can say, do or predict about the choices that all of us make.

But predictably  irrational? Ah, how exactly? If our irrationality can actually be modeled, then perhaps we could understand how and why we make the choices we do. Even better, maybe we could push people towards eating more salads and less ice-cream. Although you should note that there are some people in my tribe who don’t necessarily think this to be a good idea.

Still, the study of

a) whether we think “rationally” or not, and…

b) if not, then can we think systematically about how we are “irrational” and why…

c) and can we use our findings from this exercise to make people, institutions and therefore societies behave differently (and hopefully better)…

…is the study of behavioral economics.

And the five day version (duly expanded) of this is what Savita Kulkarni and I will be talking about at Gokhale Institute over the course of the next five days. And I’ll keep you guys updated as we go along.