Tuesday, June 17, 2008

$1.25 is the New $1 a Day

Researchers take a second look at the $1/day definition for poverty.

Thanks to American inflation, $1.08 in 1993 was worth about $1.45 in 2005 money. In principle, the researchers could count the number of people living on less than this amount, converted into local money using the bank's new PPP rates. But $1.45 a day strikes the authors as a bit high. Rather than update their poverty line, they propose to abandon it. It is time, they say, to return to first principles, repeating the exercise Mr Ravallion performed almost two decades ago, using the better, more abundant data available now.

They gather 75 national poverty lines, ranging from Senegal's severe $0.63 a day to Uruguay's more generous measure of just over $9. From this collection, they pick the 15 lowest (Nepal, Tajikistan and 13 sub-Saharan countries) and split the difference between them. The result is a new international poverty line of $1.25 a day.
Ironically then, the $1.25 a day is actually less than the old $1 a day after adjusting for inflation.

They also propose adding a relative aspect to the measurement.
In setting their poverty lines, most developing countries aim to count people who are poor in an absolute sense. The line is supposed to mark the minimum a person needs to feed, clothe and shelter himself. In Zambia, say, a poor person is defined as someone who cannot afford to buy at least two to three plates of nshima (a kind of porridge), a sweet potato, a few spoonfuls of oil, a handful of groundnuts and a couple of teaspoons of sugar each day, plus a banana and a chicken twice a week.

But even in quite poor countries, a different concept of poverty also seems to creep in, the authors argue. It begins to matter whether a person is poor relative to his countrymen; whether he can appear in public without shame, as Adam Smith put it.

This notion of relative deprivation seems to carry weight in countries once they grow past a consumption of $1.95 per person a day. Beyond this threshold, a country that is $1 richer will tend to have a poverty line that is $0.33 higher (see chart). The authors thus base their absolute poverty line on the 15 countries in their sample below this threshold.
I am not sure how they measure the "richness" of a country, but you use median household income, then in the US the poverty threshold would be 1/3 of $48,201 or $16,067. This is almost exactly the same as the $16,079 poverty threshold the Census Bureau uses for a family of 3.

And how does this new definition impact the number of poor in the world?
The authors are not yet ready to say. But they have taken another look at China. By their new standard, they find that 204m Chinese people were poor in 2005, about 130m more than previously thought.
via The Economist

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