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Another Look at Poverty

As the world argues about how to define poverty, China leads the way in fighting the battle against it.

26th November 2007 | Stephen McCutcheon

The world’s report card is in. From 1981 to 2004, the number of people living on less than $1 per day declined from 1.5 billion to 980 million people at about 0.8 percent per year. In China alone the decrease was a staggering 400 million people.

Today, worldwide poverty is decreasing and is expected to reach around 0.6 billion by 2015. Although absolute poverty increased by 150 million people in Sub-Saharan Africa, 41 nations there recently submitted Action Plans as they joined the race to meet the Millennium Goals.

But are these claims justifiable and do we really know what poverty is? The UN claims that at current progress rates, we will half poverty and hunger worldwide by 2015, yet can we really define the problem so easily? Defining someone’s life is hardly a walk in the park so here we present another look at poverty.

What is Poverty?
...denial of opportunities and choices most basic to human development - to lead a long, healthy, creative life and to enjoy a decent standard of living, freedom, dignity, self-esteem and respect from others.
(UNDP, 1997).

We’ve all heard about it, billions are affected by it, but what actually is poverty?

Poverty is your home and possessions wiped out by a mudslide with no hope of salvation. Poverty is a state of perpetual need for resources you can never hope to have. Poverty is a loved one leaning on death’s door without the money to heal them. Above all poverty is a lack of choices.

People in poverty are deprived of the most basic needs in life such as clean water, food, shelter and good health. Most lack assets of any value, few have savings and all live at the mercy of others and the vagaries of life.

In general terms, a person living in extreme poverty, lacks the most basic of resources necessary to lead a functioning adult life in their country. Such people spend their entire lives in a continual cycle of suffering without limits, where the tiniest of gains can become the quickest of losses.

Life in poverty has no support and no fallback. For the average person on the edge of existence, their body is the best insurance they own and ill health is often disastrous to their future.

What is Poverty? A social standard or a scientific way of measuring somebody’s life? One thing for sure is that not even the World Bank is entirely sure, and arguments have raged for years on how to measure it.

Setting a Standard

Nearly all countries calculate poverty by setting a minimum daily level necessary for physical survival and finding the number of people who live beneath it, i.e. below the country’s poverty line.

Since no country has the same foods or living standards, national poverty lines vary from nation to nation, but the ways they are measured vary:

  1. Relative poverty lines are usually measured as a percentage of people’s income below which they are defined as ‘poor’ or in poverty (i.e. a minimum standard of living). For example, China’s national poverty line used to be measured as the total population surviving on 20% or less of the average rural wage.
  2. Absolute poverty lines are a fixed standard that measures whether someone is able to purchase a minimum amount of food and non-food items as recommended by the Government. For example, India measures poverty against a minimum daily energy intake of specific foods and non-foods.

To measure absolute poverty lines accurately, expenditure data from household surveys is compared against the cost of a typical basket of goods that provide the daily minimum energy requirement needed to survive (e.g. 2100 calories). Basic non-food items may also be included and item costs adjusted to local prices using a Consumer Price Index (CPI).

Over time, National Poverty lines can be updated using CPI rates but many economists question their validity. For one thing, living standards usually vary across each country, especially between urban and rural areas, and the legitimacy of survey data may also be suspect.

Going International

As any economist will rightly tell you, when it comes to calculating global poverty levels, national poverty lines are too varied to be comparable. Nations usually have different living standards as well as different ways of collecting and calculating data.

In 1990, the World Bank released its famous $1 US dollar per day poverty line as an international guide to the state of the world’s poor.

Its proponents claimed it provided an immediate trans-national yard stick against which world poverty could be measured. On the other hand, its detractors pointed out that the standard was far too general to be an accurate guide to global poverty.

The new standard was first calculated using 1985 survey data sets, when the World Bank realised that several National Poverty lines were close to $1 US in value, when using Purchasing Power Parity (PPP) rates available at the time.

Goods and services traded on international currency markets (including financial services) are hardly the same as goods bought locally on the street making them unsuitable to compare.

Purchasing Power Parity assumes that a standard basket of goods has equal value in every nation around the world. It means that $1 spent in India buys the same goods as $1 spent in the United States, (i.e. it’s a more equal measure of living standards across international borders).

Using data from local household surveys, the World Bank was able to calculate the expenditure of the average person and compare it to the one dollar standard. Where consumption figures were unavailable, income data was substituted.

In 1993, the World Bank updated its PPP rates in a second global survey and a dollar a day was revalued to $1.08 at then prices. Whilst the standard has proven popular, many economists doubt whether it provides a true picture of world poverty.

Today, two figures from the World Bank are widely cited in the media; namely the number of people living under $1 and $2 per day. The former reflects extreme poverty or the inability to buy even the minimum amount of food necessary to live, whereas the latter states the ability to afford other basic items.

Recently, the World Bank revised PPP rates using results from a 2005 survey to enable a truer comparison of standards of living in each country. The new figures will be published later in full later this year.

How useful are Poverty Lines?

Every day, a debate rages somewhere over the relevance of the World Bank’s answer to national poverty levels.

On the plus side $1 is convenient and simple enough for global donors to understand. It provides a common standard based on the currency of the strongest economy in the world and is readily updatable using country to country CPI data.

However many people argue that perhaps a dollar per day is a little too cut and dry.

For one thing, it tends to simplify the scourge of poverty into nothing more than an income problem, whilst ignoring the complex issue of why it occurs in the first place. It also reflects uneven progress, which is an important point to note.

You see the World Bank calculates global poverty based on headcount ratio rather than an absolute number of people affected. The UNDP gives an excellent example:

"If in one time period 30 persons in a population of 100 are poor, while in a later time period 40 persons in a population of 200 are poor, then the headcount ratio declines from 30 per cent to 20 per cent, whereas the aggregate headcount rises from 30 persons to 40 persons. This type of problem is often encountered."

In other words while the population increases, the total number of people in poverty may in fact increase, even though the percentage appears to decrease. In other words absolutely nothing has changed for the people who were poor in the first place.

We can use Global Poverty as a good example. Using the World Bank’s method, poverty has halved worldwide from 40 % in 1981 to 21% in 2001. However, the absolute number of people has only declined from 1.5 billion to 1.1 billion showing that headcount ratios can often be misleading.

Purchasing Power Parity remains another problem for argumentative economists not happy with the World Bank’s method.

Originally, Purchasing Power Parity rates were designed to compare national incomes rather than poverty values. The traditional ‘basket’ of items on which the rates are based, represent items that the poor are never likely to buy. Although for now there is no better alternative.

The World Bank has replied to these criticisms by arguing that $1 per day is only intended as a guide and should be taken with other measures of poverty such as child mortality and literacy figures.

In 2005, the Bank conducted its third global survey of PPP indices which puts greater emphasis on a basket of items that the poor are more likely to buy, as well as including data from China for the first time.

For the time being, most economists agree that there is no better method to calculate international poverty. The World Bank’s latest PPP rates will be included in its World Development Report 2008 and preliminary figures already released this year offering an intriguing insight into the shape of things to come.

The Case in China

There’s no denying that both India and China have had a profound effect on world poverty over the last 30 years, but the effect of China is in particular worth telling.

In 1978, Deng Xiaoping’s decision to open up China marked one of the greatest transformations the world has ever seen. By 2002 the Middle Kingdom had slashed the number of people living below $1 per day from 490 million to 88 million (or 29 million (2000) by China’s national standard).

China can uniquely claim to being almost singly responsible for global poverty reduction over the past quarter century. By 2001, the country had already halved national poverty figures and met the first Millennium Goal 14 years ahead of schedule.

Thus the question remains, how did China go from having one of the highest rates of poverty in the world to one of the lowest in only 30 years?

Gaigé kaifàng:

With the death of China’s great spiritual leader Mao Zedong in 1976, China embarked on its path to development under the "four modernizations" of industry, agriculture, national defence and science and technology.

After the turmoil of pre-Seventies China, agricultural reforms in-particular had an immediate effect on poverty nationwide. Collective farms were broken up and people were assigned individual plots of land from which they could sell surplus crops.

Between 1978 and 1985, poverty halved from 250 million to 125 million according to national poverty figures, mostly in rural areas. People had not forgotten how to farm and were able to earn income on their own assets for the first time.

In 1981, 80 percent of China’s population lived in its rural areas and the Government understood that improving rural growth was key to lowering the nation’s poverty rate of almost 50 percent.

As the country migrated from a planned to a market economy, China began to invest heavily in national productivity, infrastructure and local institutions. Power was gradually devolved to local governments and ‘taxes’ on farm produce were lowered to give farmers a better return.

At the end of the eighties/early nineties, rural growth slowed and poverty levels soon stagnated. Although the economy was rocketing along at an average 9.4% per annum, the easy financial gains of the early days had disappeared and the poor were once again finding life difficult.

In 1994 the Chinese Government began its ‘8-7 Plan’ for poverty reduction. Aimed at both the poor and rural development, the plan targeted the poorest counties across the country in a bid to eliminate poverty by the year 2000.

Over six years, the Government spent 5-6 percent of GDP every year on the project. The plan focused on three areas; namely agricultural improvement, local infrastructure (roads, sanitation and electricity) and education/healthcare.

Whilst poverty was not eliminated, it was halved, and people’s lives were improved through increased output. By the year 2000 the number of poor below the poverty line stood at 32 million and at 21.48 million in 2006 (using national poverty lines).

For 2001 to 2010, the Government has launched a new Rural Poverty Alleviation Program designed to eliminate poverty at the end of the decade. The new plan builds on lessons learnt from the ‘8-7 plan’ by targeting specific villages rather than counties and investing more in primary education in Western and Central China.

China has compressed 100 years of change into 20-plus years, and not everything will fit.
Khalid Malik, UN resident coordinator in China
What was learnt?

Pure economic growth is not a surefire guarantee of long term poverty reduction. The problems of the poor become more complex, the lower the poverty rate becomes and long term, targeted polices are needed to overcome them.

The biggest problem facing China’s poor today is one of income inequality in rural areas. Studies show that rural growth increases as inequality decreases, however, the income gap between rich and poor is at an all time high.

The Gini index is a measure of income disparity around the world calculated on a scale 0 to 100. The lower the value, the higher the equality. China’s value of 41 percent is one of the highest in the world and reflects the uneven progress of China’s development over the past 30 years.

Income inequality refers to the distribution of wealth across the country. If inequality is high, then money is less available and the poor have fewer opportunities to earn, thus lowering rural growth.

China’s initial land giveaway in 1981 meant that the majority of the poor had greater opportunities to make money, lowering inequality. For the poor living near to the poverty line, money was made quickly and many escaped the poverty cycle.

However, they were the lucky ones. Today, the majority of people living in poverty were not so able to break their situation so easily. Their story is one told on the sidelines of society and one constantly influx with China’s pattern of development.

Economics of Inequality

Contrary to popular thinking, a study by World Bank economist Martin Ravaillion, noted that income inequality between urban and rural remained unchanged between 1981 and 2001. The main problem lay within rural areas themselves.

Economic development programmes aimed at rural poor, not only affected poverty within rural areas, but also that within urban zones as well. Investment in agriculture inparticular substantially lowered inequality amongst China’s poor.

However, most of China’s rural reforms so far have been concentrated away from the areas that need it the most. Poverty rates declined at 17 percent along China’s rich East coast as opposed to 8 percent within the needier Western regions.

Just as bad was sectoral imbalance, with a preference from the Government to concentrate resources on reforming industry over agriculture.

On the plus side, China has seen steady growth, a strong economy and low inflation for over 30 years which has provided rural society with a better chance to catch up with reforms so far.

The Middle Kingdom’s broad sector reforms in agriculture and welfare have vastly improved the lives of the rural poor. The impact of her poverty programs have achieved good rates of return where applied but have not been done on a macro enough scale to have a larger effect nationally.

After the easy gains (or "low lying fruit") of China’s initial economic surge in the early eighties, China’s remaining poor are those living on the extreme margins of society, often in the most inaccessible places and under the harshest conditions.

Whilst continued poverty programs are likely to be effective, general reforms are still needed in primary education, infrastructure and agriculture. Corruption is still a national problem and land privatisation may prove China’s biggest problem in the coming years ahead.

Monitoring Progress

In 1997, the Chinese Government implemented a ‘National Monitoring System’ to track the poor in a rapidly changing country. By surveying a nationwide sample of fixed and random households the new system provides a better way to track poverty. Records now include income, access to market, education and social security.

Data accuracy is important in household surveys and many families taking part are asked to keep a yearly diary of data needed. Records are not only used to calculate poverty lines, but also poverty distribution and characteristics.

The World Bank recently aided China in setting up a new Poverty line to reflect increased housing income, expenditure and changing food habits. China also now includes regional poverty lines due to the variation in the poor across the nation.

China’s experience is consistent with the view that promoting agricultural and rural development is crucial to pro-poor growth in most developing countries. Ravallion and Chen (2004)

Challenges Ahead

China’s successes so far in reducing poverty have resulted from concerted economic, political and national efforts. The ability of the Government to involve wide swathes of bureaucracy to keep the battle running smoothly is a direct nod to the uniformity of Chinese governance especially given the size of the country and scale of the problem.

However, now the Middle Kingdom faces a huge challenge in the face of income inequality and renewed investment is needed in nationwide agricultural reforms to increase the earning opportunities of farmers and increase rural growth.

In 2003, the poverty rate increased by 800,000 people for the first time in 25 years due to a high number of natural disasters in western China, underscoring the need for investigation into a threat that supposedly reduces 55 percent of households to below the poverty line each year.

Renewed interest is also needed in regions of high illiteracy such as Tibet (47.25%) and Gansu (19.68%) where poverty is rampant - of the few opportunities that do exist, few people have the know-how to make any money from them.

Health is also a major issue for people in the country’s outlying areas. Illness induced poverty is one of the greatest curse of the poor, with the average operation costing over 7000 RMB in a country where the average agricultural wage is 8309 RMB.

Whilst China is still a low income country, approximately 500 million people live on less than $2 dollars per day, approximately 20 percent of the world’s estimated 2.7 billion people.

At present, except for some 26 million disabled people or those living in extremely bad natural environment areas, we have succeeded in eliminating absolute poverty in the country," Gao said.
Gao Hongbin, Government of China (China Daily, 17 Nov 2000)
Conclusion

The famous Nobel winning Indian economist, Amryata Sen, once said that if the poor had greater purchasing power, world food production would actually increase and in many ways that is true.

The World Bank’s recent report on China reports that income growth in rural areas, particularly in agriculture, results in higher incomes, lower inequality and nationwide reductions in poverty.

Over the next five years to 2011, China plans to invest $1.5 trillion dollars in power, transport and sanitation to finally bring the country’s vast interior in contact with the rest of the world. But are the poor ready for it?

In all the excitement and hype over global poverty we must remember that $1 (or $2) per day is only a scientific measurement subject to change.

The ‘dollar-a-day’ standard recently increased by 10 percent to over 1 billion in 2005, according to the World Development Report (2008), upending any ‘gains’ made in the past and explaining the absence of post 2004 poverty figures by the World Bank recently.

The number of people (headcount) living under $2 recently grew in 2004 by 100 million people to over 2.5 billion and yet are these statistics relevant? Should we be really worried about the results?

The answer is both yes and no. On the one hand statistical information from household surveys, particularly in population giants like China and India, are rapidly improving and World Bank economists spend infinite time and effort to ensure data is interpreted accurately.

On the other hand, any slight variation in statistical data can make any previous gains obsolete and the world in that case, simply becomes a puppet to the data releases of the World Bank.

Thus, we have a guide and (just like China’s enthusiastic ‘news’ service) the world must treat it as such, especially any sort of projection.

When taken across the board, figures from a number of agencies for literacy, child mortality, gender equality etc... all so the development is improving and the world needs to be optimistic in this 80:20 universe of rich and poor.

Some people run fast, some people run slow, but at the end of the day, we all deserve an equal chance to compete. The development of India and China increasingly promise hope for the future, but as studies have shown, uniformity is the best answer to disparity in this world.

For full references for this article, please see "Full Version" below

Note on Sources:

All data quoted above conforms with World Bank Development indices unless otherwise stated. Although the UN does use World Bank data in their Millennium Goal monitoring reports, they also use their own standard in the Human Development Reports that was not suitable for comparison in this article.

For additional quotes and full references for this article, please see "Full Version" below.

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