Will Growth eradicate poverty?

David Donaldson and Esther Duflo

14.73, Challenges of World Poverty MIT

“A world Free of Poverty” � Until the 1980s the goal of economic development was

economic growth (and perhaps the eradication of crises) � Now it is increasingly “poverty reduction” � World Bank “ A world free of poverty” � Millenium development goals, adopted by the general

assembly of the United Nations : 8 goals to be achieved by 2015, including eliminating poverty and hunger, and specifically, “reduce by half, between 1990 and 2015, the proportion of people whose income is less than $1 a day”.

� Some argue that the two goals are not that different: economic growth is the best way to reduce poverty, so by focusing on economic growth, we can eradicate poverty.

� Other argue the opposite, economic growth does not benefit the poor

� Who is right?

Is Growth Good for the Poor?

� We need to start with some definitions... � Growth? � Good? � The poor?

How to define poverty?

� Poverty is a multi-dimensional concept:

� Low income/overall consumption

� Absolute? or relative? or both?

� Amartya Sen: Poverty is the absence of one or more of the basic capabilities that are needed to achieve minimal functioning in the society in which one lives. (education, health, etc.).

� The UN collects the “human development index” which is a summary of GDP, access to education, mortality.

� The millenium development goals trace 8 aspects: end poverty and hunger; universal education; gender equality; child health; maternal health; combat HIV AIDS; environmental sustainability; global Partnership.

� Today’s article focuses on income poverty

What is good?

� In the Dollar and Kray article, what do they mean by “good”? � Growth increase the income of the poor on average

equi-proportionally to that of every one: � The share of the national income the poor get does not

change: � or: when GDP per capita increase by 10%, the income of the

poor increase by 10%. � e.g. if GDP was 1000 dollar per capita, and the poor were

getting on average 200 dollars per capita, if GDP increases to 1100 dollars, the income of the poor will increase to 220 dollars.

� What does this imply for the absolute difference in income between the rich and the poor?

What is good?

� What else could we (or the poor) mean by “good”: � That when GDP increases by 100 dollars, their income increase

by 100 dollars as well? � That when GDP increases by 100 dollars, their quality of life,

access to services, increase. � The two are not correlated one for one: for example the rate of

child mortality reduction was much lower in the 1990s than in the 1980s, despite the fact that (income) poverty reduction was more rapid in the 1990s than in the 1980s. China, Kerala, Sri Lanka, Cuba, have made great progress against child mortality and lack of education before any economic reform.

What is growth?

� Economic growth is measured by the growth of the Gross Domestic Product (GDP), divided by the number of people, and valued at purchasing power parity (data available on the web on the “Penn World Tables”

� The GDP is measured in the National Account Statistics of all the countries. The national accounts are all in principle measured using the same protocol, laid out by the United nations (SNA93), and try to measure the “production boundary”: all exchanged items, plus non-exchanged goods (food for home production), and the value of living in your own home.

Measuring income poverty: P

overty line � Poverty line: you are poor if your income (or your

consumption) falls below some line. � Historically, a poor person wassomeone who did not have

enough to eat: start from a calorie requirement (e.g. 2000 cal per person per day) and we calculate how much it would cost someone in this person to get 2,000 calories with the “normal” diet in the country

� Once poverty line are set, they are usually adjusted only for inflation, so they lose their relationship with food.

� To measure the number of poor people in the world, we need one single poverty line. The World Bank proposed a line which was an average of poverty lines in poor countries, and was 1.08 dollars per day (later revised to 1.25) for “extreme poverty”, and 2 dollars for poverty.

� One dollar a day, valued at PPP, turns out to be about the poverty line in India.

Counting the poor

� A first method to measure the income of the poor is interview enough poor people, and ask them what they

� It is easier to measure what the poor consume than what they earn. Why?

� But this is long and expensive, may be too long and expensive to do every year: another method is to assume that “growth is good for the poor” (in the narrow definition of Dollar and Kray): in the short run, everyone gains proportionally from growth.

� To do that, the first step is to show that growth is good for the poor.

Do the poor benefit from rises in income proportionally?

Reproduced with permission of the copyright owner. Further reproduction prohibited without permission.

Figure by MIT OpenCourseWare.

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Do the poor benefit from growth proportionally?

Reproduced with permission of the copyright owner. Further reproduction prohibited without permission.

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The Exercise

� household survey data (and other data sets) allows to compute the share s of income that goes to the 20% poorest.

� multiply s by GDP per capita (y) in that year: this is the income of the poor

� plot log(income of poor) against log(GDP per capita).

� a slope of 1 in a log-log relationship means that 1% increase in GDP is 1% increase in the income of the poor.

� Note that log(s ∗ y) = log(s) + log(y), so if log(s) is approximately a constant (or has nothing to do with log(y), it is not surprising that we get a coefficient of 1.

� if we plotted log(s) against log(y),what would we find?

� So this finding is that, on average, inequality is roughly uncorrelated with income

GDP

and inequality 31

Figure 2: Income levels and poverty around the world

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Figure 1: Income levels and inequality around the world

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Interpretation

� The fact that this is true on average does not mean that this is always the case: there are large variation from countries to countries, and period to period: for example, growth did not lead to a reduction of poverty in India in the 1990.

� It just means that there is no systematic relationship. � May be there is a reverse causality: what is good for poverty

is good for growth � Think of the vicious circles: when the poor are too poor,

countries fail to grow. � Politics: when an economy leaves the poor behind, they

protest (example: Brazil in the 1970s and 1980s), and growth eventually stops.

The great poverty debate

� An influential article by Xavier Sala-i-Martin applied the Dollar-Kray logic to the end

� Using survey data, compute the distribution of income in all the years you have it for a country

� In years where you do not have it, assume it is like in other years.

� Compute everybody’s income by multiplying their share of income by the GDP in that year.

� You can now get the worldwide distribution of income

� 1 dollar a day line: Poverty rate declined from 15.4% in 1970 to 5.7% in 2000, and the total number of people living under a dollar a day declined from 534 to 322 million in the same period. We have largely achieved the MDG 1!!

China

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Figure II.A: Distribution of Income in China

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Figure II.B: Distribution of Income in India

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Figure II.C: Distribution of Income in USA

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Figure II.B: Distribution of Income in India

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Figure III.A: The WDI and Individual Country Distributions in 1970

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Figure II.G: Distribution of Income in USSR-FSU

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Poverty numbers

TABLE I: Poverty Rates and Headcounts for Various Poverty Lines POVERTY RATES

Poverty Line Definition 1970 1975 1980 1985 1990 1995 2000 Change 70-2000

$495 WB Poverty Line ($1/Day) 15.4% 14.0% 11.9% 8.8% 7.3% 6.2% 5.7% -0.097

$570 $1.5/Day 20.2% 18.5% 15.9% 12.1% 10.0% 8.0% 7.0% -0.131

$730 $2/Day 29.6% 27.5% 24.2% 19.3% 16.2% 12.6% 10.6% -0.190

$1,140 $3/Day 46.6% 44.2% 40.3% 34.7% 30.7% 25.0% 21.1% -0.254

POVERTY HEADCOUNTS (thousands)1970 1975 1980 1985 1990 1995 2000 Change 70-2000

Population 3,472,485 3,830,514 4,175,420 4,539,477 4,938,177 5,305,563 5,660,342 2,187,858

Poverty Line Definition

$495 WB Poverty Line ($1/Day) 533,861 536,379 498,032 399,527 362,902 327,943 321,518 -212,343

$570 $1.5/Day 699,896 708,825 665,781 548,533 495,221 424,626 398,403 -301,493

$730 $2/Day 1,028,532 1,052,761 1,008,789 874,115 798,945 671,069 600,275 -428,257

$1,140 $3/Day 1,616,772 1,691,184 1,681,712 1,575,415 1,517,778 1,327,635 1,197,080 -419,691 !!

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What does survey data sa� If you are using survey

y? data to compute inequality, wouldn’t it

be more logical to also use it to measure income or consumption?

� This is the way the World Bank measures poverty: instead of using the share of income and multiply it by the GDP, it directly compute the number of people who consume less than a dollar a day.

� You do not have data every year for every country, but you have enough data to look at what happens over the long run.

� When you do that, you find much higher poverty rates � The main source of the difference is that the survey data

indicate lower average consumption than the GDP, and this gap is growing as countries grow.

� If we believe the survey data for inequality, we should also believe it for the mean... so internal consistency suggest that we should use the survey data, even if it is not perfect.

Poverty Rates according to the World Bank

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Table 2: Poverty measures for $1 a day (a) Percentage of population

Region 1981 1984 1987 1990 1993 1996 1999 2002 2004 East-Asia and Pacific (EAP) 57.73 39.02 28.23 29.84 25.23 16.14 15.46 12.33 9.05 Of which China 63.76 41.02 28.64 32.98 28.36 17.37 17.77 13.79 9.90 Eastern-Europe+Central Asia (ECA) 0.70 0.51 0.35 0.46 3.60 4.42 3.78 1.27 0.94 Latin America+Caribbean (LAC) 10.77 13.07 12.09 10.19 8.42 8.87 9.66 9.09 8.64 Middle East+North Africa (MNA) 5.08 3.82 3.09 2.33 1.87 1.69 2.08 1.69 1.47 South Asia (SAS) 49.57 45.43 45.11 43.04 36.87 36.06 34.92 33.56 30.84 Of which India 51.75 47.94 46.15 44.31 41.82 39.94 37.66 36.03 34.33 Sub-Saharan Africa (SSA) 42.26 46.20 47.22 46.73 45.47 47.72 45.77 42.63 41.10 Total 40.14 32.72 28.72 28.66 25.56 22.66 22.10 20.13 18.09 Total excl.China 31.35 29.69 28.75 27.14 24.58 24.45 23.54 22.19 20.70

(b) Number of people

Region 1981 1984 1987 1990 1993 1996 1999 2002 2004 EAP 796.40 564.30 428.76 476.22 420.22 279.09 276.54 226.77 169.13 China 633.66 425.27 310.43 374.33 334.21 211.44 222.78 176.61 128.36 ECA 3.00 2.27 1.61 2.16 16.94 20.87 17.90 6.01 4.42 LAC 39.35 50.90 50.00 44.60 38.83 42.96 49.03 48.13 47.02 MNA 8.81 7.26 6.41 5.26 4.53 4.38 5.67 4.88 4.40 SAS 455.18 445.05 471.14 479.10 436.74 452.91 463.40 469.55 446.20 India 363.72 359.41 368.60 376.44 376.14 378.91 376.25 377.84 370.67 SSA 167.53 199.78 222.80 240.34 252.26 286.21 296.07 296.11 298.30 Total 1470.28 1269.56 1180.73 1247.68 1170.17 1087.81 1108.61 1051.46 969.48 Total excl.China 836.62 844.29 870.30 873.35 835.96 876.37 885.83 874.85 841.12

Source: Chen and Ravallion (2007). The set of countries are the Part 2 member countries of the World Bank, which is essentially all low and middle-income countries, which the Bank currently defines as having average GDP per capita over 2004-06 no more than $11,115.

Conclusion A few ideas to keep in mind:

1. Inequality is uncorrelated with growth graph

2. Poverty reduction is correlated with growth on average: growth is good for the poor on average graph

3. However there is great heterogeneity from country to country and period to period (greater than Art and Kray beautiful picture suggests)

4. Many things matter: initial inequality; whether or not inequality increased during the growth process; regional repartition of growth; sectoral composition of growth.

5. There may be a reverse causality from inequality to growth.

6. What is interesting is the disparity of experiences: to find out how to reduce poverty, we will need to dig much deeper into the determinant of well-being at the individual level.

GDP and inequality 31

Figure 2: Income levels and poverty around the world

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Head

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Figure 1: Income levels and inequality around the world

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GDP and poverty

31

Figure 2: Income levels and poverty around the world

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Figure 1: Income levels and inequality around the world

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