L2 What is Poverty

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L3 - Development Economics - Pantheon Sorbonne University

Lecture 2:

What is poverty?

Marie-Anne [email protected]

Semester 1, Academic year 2011-2012

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http://find/http://goback/


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Introduction

According to the World Bank, poverty is pronounceddeprivation in well-being (World BankInstitute,Introduction to poverty analysis, (2005)).

Given that we mainly proxy well-being by income (see Lecture1), we therefore define poverty as a pronounced deprivationin income.

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Introduction

The purpose of the class today is to understand in greaterdetails what poverty means, both from a theoretical and froman empirical perspective, and why we must care about it.

The outline of the class is as follows:

1. Measuring poverty

2. What does being poor mean on an everyday basis?

3. Why must we care?

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It takes time, energy and money to measure poverty at thecountry level, since it can only be done properly by gatheringsurvey data directly from households.

Why, then, do we need to go to the trouble of measuringpoverty?

Three good reasons come to mind.

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First, this allows to make the poor statistically visible: themeasurement of poverty is thus necessary for it to appear onthe political and economic agenda (motivation I).

Second, it allows to target interventions: one cannot help the

poor without at least knowing where (and also who) they are(motivation II).

Third, it allows to evaluate policies and programs designed tohelp the poor: policies that look good on paper may, inpractice, not work as well as expected. Measures of povertyare here to identify which poverty-reduction strategies workand which ones do not work (motivation III).

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1. Measuring poverty1.1. Three axioms to be satisfied

According to Sen (Poverty: an ordinal approach tomeasurement, Econometrica (1976)), three axioms must besatisfied by any good measure of poverty:

1. The first axiom is the focus axiom: the measure should notvary if the income of the non-poor varies.

2. The second axiom is the monotonicity axiom: any incomegain for the poor should reduce poverty.

3. The third axiom is the transfer (or Pigou-Dalton)axiom: inequality-reducing transfers among the poor shouldreduce poverty.

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1. Measuring poverty.1.1. Three axioms to be satisfied

Making sure that axiom 1 is satisfied can be enough foranyone who wants a measure of poverty aiming only to makethe poor visible (motivation I) and to know where they are

(motivation II).

However, making sure that axioms 1 to 3 are satisfied isnecessary for anyone who wants a measure of poverty aimingto know whether a specific poverty-reduction strategy was

successful or not (motivation III).

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1. Measuring poverty1.2. The FGT class of poverty measures

Foster, Greer and Thorbecke (FGT henceforth) designed in1984 a family of measures which may be generally written as:

P =1

N

N

i=1;yi


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The poverty line p usually captures the budget needed to buya certain amount of calories, plus some other indispensablepurchases (such as housing).

In the following, we present the 3 most popular measures ofpoverty:

1. P0, the FGT poverty measure when = 0

2. P1, the FGT poverty measure when= 13. P2, the FGT poverty measure when = 2.

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P0 is given by:

P0 =1

N

N

i=1;yi

0), is transferred

from individual i to individual j. Let be such that individualj remains under the poverty line after this regressive transfer(i.e: yj+ < p). Write a formal proof showing that theheadcount index and that the poverty gap index actually donot change when such a regressive transfer occurs between

individual i and individual j. (2 pts) Answer: see the solution given in class.

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1 Measuring poverty


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1. Measuring poverty1.3. Practice now!

Question 3: Give the formal definition of a poverty indexwhich increases when the regressive transfer described in 2.

occurs between individual i and individual j and explain why itis so. (2 pts)

Answer: see the solution given in class.

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1 Measuring poverty


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Using measures of poverty that satisfy the 3 axioms are

critical to be able to estimate whether a poverty-reductionpolicy has been successful or not (see the excerpt from the1990 WDR below on the next slide).

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1 Measuring poverty


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2 What does being poor mean on an everyday basis?


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How do people survive on so little as 1$ a day? The answer isbrutally simple: not well.

The staff from the OPHI (Oxford Poverty & HumanDevelopment Initiative), an organization which released in

2010 a Multidimensional Poverty Index, spoke with poorpeople in various developing countries to better understandhow people experience poverty across the world.

Here are some insights from the regions of the world the mostbadly hit by poverty: East Asia & Pacific, South Asia andSub-Saharan Africa.

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Jiyem, 70, Indonesia

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Jiyem shares her home with her blind husband (who is unable

to work), her son, her daughter in law, and theirthree-year-old grandson, who is malnourished.

No one in their family has ever completed primary school.Jiyem grew up in the same village, working in the fields.

Jiyem does not earn any money, nor does she have savings.Her son works in the rice field, or in a sugarcane field, aboutfour hours per day. He earns around 85 USD to 127 USD permonth (2.8 USD to 4.2 USD per day)

Although she can joke about her life, the situation is

precarious, and troubling. I cannot picture what well-beingmeans, says Jiyem. This, she said, pointing to her presentsurrounds, is illbeing.

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Rabiya, 35, India

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Rabiya is a wage labourer. She is a widow and lives with her

two unemployed teenage sons. She owns no land. She earns a living by working the fields of

farmers in hers and neighbouring villages. During theagricultural season, she is paid INR 25 (USD 2.8) a day. Suchwork lasts no more than two months a year and does not

guarantee daily employment. She regrets not being able to study herself or educate her

children. She wants her children to be able to lead dignifiedlives. She would like them to be free from daily worrying

about what to feed their families and to have a house to calltheir own, with toilets and access to clean drinking water.

I want nothing for myself, just that my children should behappy.

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Dalma, 30, Kenya

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g p y y

Dalma, her husband and their 7 children live in Lunga Lungaslum (close to Mombasa), after leaving their village in central

Kenya in search of a better life. Her husband can only work when there are jobs available in

the surrounding industry park. Unfortunately this isnt thatoften. She tries to earn a little from other households bydelivering water for them.

The overall household income is inadequate to support thefamilys needs:

One of the daughters should already be enrolled in preschoolbut the parents cannot afford the registration fee (USD 9.87).

On top of this, the family sometimes has to go without meals.

Dalma hopes that in the future her family will be able torenovate their current old-iron sheeted house and enlarge it.In the meantime she hopes to find well wishers who will fundher girls to attend secondary school. Dalma says she feelshopeful when there is no sickness in the home.

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g p y y

Banerjee and Duflo (The economic lives of the poor,Journal of Economic Perspectives (2007)) exploit householdsurvey data to better understand the everyday life of the poorin Asia, Africa, and Latin America.

More specifically, they analyze surveys conducted in 13countries: Cote dIvoire, Guatemala, India, Indonesia, Mexico,Nicaragua, Pakistan, Panama, Papua New Guinea, Peru,South Africa, Tanzania, and Timor Leste (East Timor).

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g p y y2.1. Where does the money of the poor come from?

Many of the poor live in rural areas.

For those who own a very small plot of land that theycultivate, they operate this agricultural business alongside anonagricultural business.

Finding some work outside agriculture is indeed a way for thepoor to make productive use of their time when the land isunusable, which is often the case since their piece of land israrely irrigated.

For those who own no land, they work the field of localfarmers and often combine this activity with non agriculturalones too.

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g p y y2.1. Where does the money of the poor come from?

Here are examples of such non agricultural activities:

Buying some fruits and vegetables at the wholesalers andselling them on the street; Making dosas (the rice and beans pancakes that almost

everyone eats for breakfast in south India) and selling them infront of ones house;

Collecting cow dung and drying it to sell it as a fuel; Sewing saris (the long piece of decorative cloth that Indian

women drape around themselves) and selling them from houseto house... etc

In the same day, once an individual is done with a task (e.g.,frying dosas), she starts a new one (e.g., sewing saris).

Poor households have multiple but low value addedoccupations (they usually have low levels of education andthey anyway live in countries with embryonic modern sectors manufacturing or service sectors).

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2.2. What do the poor consume?

Surprisingly, food represents only from 56% to 78% of the 1$

per day that is at the disposal of the poor. They spend a non negligible share of their earnings in nonfood

items such as festivals (wedding, funeral, religious festivals)that stand for 10% of the budget in India, and on alcohol andtobacco (5% of the budget in India).

Finally, the extremely poor spend very little on education. Theexpenditure on education generally hovers around 2% ofhousehold budgets.

The reason education spending is low is that children in poor

households typically attend public schools or other schoolsthat do not charge a fee.

However, public schools in these countries are oftendysfunctional, with a very high absence rate among teachers(more than 20%).

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The most surprising evidence regarding poor households

consumption is that the poor do not spend much of theirbudget in buying calories. Even for the extremely poor, forevery 1% increase in the food expenditure, about half goesinto purchasing more calorific items and half goes intopurchasing more expensive (conspicuous) and better tasting

(but less calorific) items (sugar, salt, tea...). More specifically, the poorest people in India consume on

average slightly less than 1,400 calories a day. This is half ofwhat the Indian government recommends for a man withmoderate activity, or a woman with heavy physical activity.

Among the poor adults in Udaipur (India), the average bodymass index (the weight in kilograms divided by the square ofthe height in meters) is 17.8 which is below the standardcutoff for being underweight (that is set at 18.5 by WHO).

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The very low number of calories consumed by the poor has adramatic impact on their health and on their productivity atwork.

The poor are frequently sick or weak: 55% of the poor adults in Udaipur are anemic, which means

they have an insufficient number of red blood cells; in India, 72% report at least one symptom of disease and 46%

report an illness which has left them bedridden or necessitateda visit to the doctor over the last month;

43% of the adults and 34% of the adults aged under 50 report

difficulty carrying out at least one of their activities of dailyliving, such as working in the field, drawing water from a well,or even walking.

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2.3. Why dont the poor try to be... less poor?

Why dont the poor save money (instead of spending it intobacco, or sugar, or festivals) to carry out an investment that

would make their lives more prosperous in the future (likebuying an irrigation system for their land when they haveone)?

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First of all, even by saving during entire months and years, itis not sure that the poor will gather the amount necessary tocarry out an investment that would significantly increase their

well-being in the future. Some of them are just too poor, meaning that, even by saving

the money they would otherwise have spent in festivals ortobacco, their saving potential remains very limited andunlikely to allow them to implement high-returns investments.

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Second, saving at home is hard (the poor typically have nobank accounts). The money may be stolen (especially if youlive in a house that cannot be locked) or grabbed by theirspouse or their children.

See the interviews by Anderson and Baland (The economicsof ROSCAS and intrahousehold resource allocation,Quarterly Journal of Economics (2002)) of women in aKenyan slum:

You cannot trust your husband. If you leave money athome, he will take it.

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Third, the poor show a high time preference. This meansthat the poor tend to focus on their well-being in the present,and not so much on their well-being in the remote future.

Time preferences are captured mathematically by the discountrate. The higher the time preference, the higher the discountrate placed on returns receivable in the future.

This high time preference of the poor is certainly stronglyrelated to the fact that they have a high probability, because

of their poor health status, to die before this future happens.

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2. What does being poor mean on an everyday basis?b ?


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In other words, it is difficult for the poor to resist temptationsto spend (to buy something, to help someone to whom youfind it difficult to say no your children, ...).

This is even more true since many of the temptations

they are resisting are things that everyone else mighttake for granted. See the interviews by Gugerty (You cant save alone:

commitment in ROSCAS in Kenya, Economic Developmentand Cultural Change (2007)) of households in Kenya:

You cant save alone: it is easy to misuse money. Saving money at home can make you extravagant in

using it.

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2. What does being poor mean on an everyday basis?2 3 Wh d h b l ?


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Why dont the poor eat more and better?

Eating more and eating better (more grains and iron-richfood, less sugar) would indeed increase their productivity, andeven happiness.

Here again, the high time preference of the poor can explain

why the sacrifice of eating more and better today (i.e: notconsuming alcohol and conspicuous products) is notcounterbalanced by the perspective of productivity gains inthe future.

This is specially true since, even by dedicating their entirebudget to food, the poor would certainly not be able to reacha sufficiently high health status to become fully productive inthe future.

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2. What does being poor mean on an everyday basis?2 3 Wh d t th t t b l ?


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Why dont the poor invest more in education?

The children of the poor are, by and large, going to primaryschool.

However, parents are not reacting to the low quality of theseschools, either by sending their children to better and more

expensive schools or by putting pressure on the localgovernments to do something about quality in governmentschools.

One reason is that poor parents, who may often be illiteratethemselves, may have a hard time recognizing that theirchildren are not learning much (for instance, poor parents inEastern Uttar Pradesh in India have limited success inpredicting whether their school-age children can read).

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2. What does being poor mean on an everyday basis?2 4 All i ll


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2.4. All in all

The previous evidence has shown us that the one-dimensionalpoverty line of 1$ a day is able to capture themulti-dimensional reality of poverty.

On an everyday basis, being poor indeed means being plaguedby hunger, diseases and low levels of education (in ruralUdaipur, only 5% of women were literate at the time of the1991 census).

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2. What does being poor mean on an everyday basis?2 4 All in all


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2.4. All in all

Being poor also means not having the mindset to improveones living.

As a matter of fact, the life of the poor is alreadyextraordinarily difficult, with a much higher proportion amongpoor individuals in developing countries reporting to feel

worried, tense or anxious due to health problems, lack offood and the perspective of death (see Case and Deaton(2005)), as compared to the proportion of depressedindividuals observed among the rest of the population.

Sacrificing today for maybe a better life tomorrow is thereforesomething almost out of reach for them (and it would beout of reach for most of us as well if we shared the samepoverty status).

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3. Why must we care?3 1 Care if you are an egoist


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3.1. Care if you are an egoist

Global poverty matters a lot even to those Westerners who

generally have little regard for what goes on beyond their ownborders.

We are indeed all stuck with one another on this planet since

global poverty feeds: lower export opportunities for the firms of developed countries South/North migrations terrorism environmental degradation epidemics...etc

In other words, you should care about reducing global povertyeven if you are a pure egoist.

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3. Why must we care?3 2 Care if you are an altruist


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3.2. Care if you are an altruist

Economic theory assumes that we are rational individuals,meaning that we think about the most efficient way ofworking for our self-interest.

However, there is widespread evidence that we are nothomines oeconomici only: we can also show altruisticconcerns (although these altruistic concerns may be ultimatelyrooted into human species self-interest, like its ability toperpetuate).

Which of these concerns appears to be the most prominent?

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3. Why must we care?3 2 Care if you are an altruist


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Certainly ones compassion for the poorest/the weakest, amotive that was theorized by Rawls (1971) under the namemaximin principle.

Under the maximin principle, a fair allocation of resourcesshould be the one that maximizes the primary goods(among which well-being) of the least privileged group.

The maximin principle (also abusively called Rawlsian

altruism) seems widespread among individuals (suggestingthat few of them are pure egoists).

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3. Why must we care?3.2. Care if you are an altruist


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Adam Smith, in the Theory of Moral Sentiments (1759)already acknowledges its influence on individuals behavior:

How selfish soever man may be supposed, there are evidently

some principles in his nature, which interest him in the fortuneof others, and render their happiness necessary to him, though

he derives nothing from it except the pleasure of seeing it. Of

this kind is pity or compassion, the emotion which we feel for

the misery of others, when we either see it, or are made to

conceive it in a very lively manner.

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Experimental economics (which analyzes individuals behaviorin a controlled laboratory setting) further confirms thepresence of Rawlsian altruism in the population.

Rawlsian altruism is teased out by the dictator game.

This game was introduced by Kahneman et al. (1986).

It is a two-person game in which player 1, called thedictator, has to decide what share s [0, 1] of an amountof money normalized to 1 he gives to player 2. For a givenshare s, the monetary payoff of player 1 and of player 2 is

given by x1 = 1 s and x2 = s respectively. How would you behave in this game if you were a pure

egoistic dictator?

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y

Clearly, you wouldnt give anything of your initial endowmentto your game partner.

Yet, Forsythe et al. (1994) show that 80% of the subjectschoose to give a strictly positive share of their initial

endowment, with 20% choosing to divide this endowmentequally.

Rawlsian altruism is therefore clearly at stake in individualsbehavior and leads them to oppose the starvation of thepoorest (even though their everyday well-being wouldnt bematerially impacted by it).

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3. Why must we care?3.3. If you care, care twice


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y

As soon as you care about global poverty (should it bebecause you are a pure egoist or a person mixing egoistic andRawlsian altruistic concerns), you have to care twice.

Indeed, poverty often leads to poverty traps (i.e: even morepoverty).

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3. Why must we care?3.3. If you care, care twice


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According to Todaro and Smith (2009), a poverty trap is a

bad equilibrium for a family, community or nation, involving avicious cycle in which poverty and underdevelopment lead tomore poverty and underdevelopment, often from onegeneration to the next.

For instance, being poor notably means not having a collateralwhile it is a necessary condition to access formal creditmarket. Any income shock (it is usually negative) like a severedrought or the death of the head of households will inevitably

make the poor plunge into deeper poverty.

The poor are highly vulnerable.

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Conclusion


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Lecture 2 has defined the concept of poverty, both from atheoretical and from an empirical perspective.

It has also stressed the importance of caring for worldwidepoverty reduction, whether one has egoistic or altruisticmotivations.

Lecture 3 will present the conceptual toolkit that is at thedisposal of development economists to help them fight against

poverty.

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Documents

L2 What is Poverty