International Poverty

What do we care about? Inequality vs. poverty John Rawls and the “maximin” principle Social and economic inequalities are to be arranged so that: a) they are to be of the greatest benefit to the least-advantaged members of society (the difference principle). b) offices and positions must be open to everyone under conditions of fair equality of opportunity. Rawls, 1971, pg. 303

Inequality vs. poverty

John Rawls and the “maximin” principle

Social and economic inequalities are to be arranged so that:

a) they are to be of the greatest benefit to the least-advantaged members of society (the difference principle).

b) offices and positions must be open to everyone under conditions of fair equality of opportunity.

Rawls, 1971, pg. 303

Making the global comparison What is the “economic unit”? Adjusting for currency differences Exchange rate conversion P(urchasing) P(ower) P(arity) conversion

What is the “economic unit”?

Adjusting for currency differences

Exchange rate conversion

P(urchasing) P(ower) P(arity) conversion

Exchange rate conversion China’s GDP, 2005 17,486,000,000 Yuan Which is bigger – China or the US? $12,455,000,000 Conversion 17,486 ÷ 7.8274 (Yuan/Dollar) = $2,234,000,000

China’s GDP, 2005

17,486,000,000 Yuan

Which is bigger – China or the US?

$12,455,000,000

Conversion

17,486 ÷ 7.8274 (Yuan/Dollar) = $2,234,000,000

Source: World Bank

When is the accurate? Law of one price Extension to the PPP model of the exchange rate Does the PPP model of the exchange rate hold? Non-traded goods Rules, regulations, transportation costs

Law of one price

Extension to the PPP model of the exchange rate

Does the PPP model of the exchange rate hold?

Non-traded goods

Rules, regulations, transportation costs

Then what is the PPP value? Use US prices to value Chinese production No Yuan prices employed No exchange rate employed

Use US prices to value Chinese production

No Yuan prices employed

No exchange rate employed

Source: World Bank

Is this value accurate? No but … Quality adjustments Beach front property in Tijuana vs. San Diego Financial market weight Quality of life assessment

No

but …

Quality adjustments

Beach front property in Tijuana vs. San Diego

Financial market weight

Quality of life assessment

Poverty lines

Getting the poverty numbers right World Bank/UNDP data β -divergence Rich countries have grown faster than poor countries σ -divergence Inequality has increased within countries This combination of factors shows that poverty must have worsened

World Bank/UNDP data

β -divergence

Rich countries have grown faster than poor countries

σ -divergence

Inequality has increased within countries

This combination of factors shows that poverty must have worsened

Example 1 A Rich 4% growth No change in poverty B Poor 18% growth 1% fall in poverty C Poor 0% growth 5% increase in poverty

A

Rich

4% growth

No change in poverty

B

Poor

18% growth

1% fall in poverty

C

Poor

0% growth

5% increase in poverty

Example 1 Average income Rich From $5000 to $5,200 Poor From $2,000 to $2,090 Gap increases Average poverty (0% + 1% - 5%) ÷ 3 = -1.33% Poverty worsens

Average income

Rich

From $5000 to $5,200

Poor

From $2,000 to $2,090

Gap increases

Average poverty

(0% + 1% - 5%) ÷ 3 = -1.33%

Poverty worsens

Getting the poverty numbers right World Bank/UNDP data What does this miss? Country size & country specific distributional issues

World Bank/UNDP data

What does this miss?

Country size & country specific distributional issues

Example 2 A Rich 4% growth No change in poverty 1,000 people B Poor 18% growth 1% fall in poverty 10,000 people C Poor 0% growth 5% increase in poverty 500 people

A

Rich

4% growth

No change in poverty

1,000 people

B

Poor

18% growth

1% fall in poverty

10,000 people

C

Poor

0% growth

5% increase in poverty

500 people

Example 2 Average income Rich From $5,000 to $5,200 Poor From $2,000 to $2,343 Gap decreases Average poverty (0% x 1,000 + 1% x 10,000 - 5% x 500) ÷ 3 = 0.6% Poverty improves

Average income

Rich

From $5,000 to $5,200

Poor

From $2,000 to $2,343

Gap decreases

Average poverty

(0% x 1,000 + 1% x 10,000 - 5% x 500) ÷ 3 = 0.6%

Poverty improves

Getting the poverty numbers right World Bank/UNDP data Xavier Sala-i-Martin Disaggregate the data to obtain headcount information The problem of missing data

World Bank/UNDP data

Xavier Sala-i-Martin

Disaggregate the data to obtain headcount information

The problem of missing data

What do the numbers say? Source: World Bank

What do the numbers say? Source: World Bank; Sala-i-Martin

What do the numbers say? Source: World Bank; Sala-i-Martin

Why has it fallen? Growth is good! Source: David Dollar, 2002

Growth is good!

Why has it fallen? Growth is good! China and India

Growth is good!

China and India

What matters? Institutions International openness Dumb luck?

Institutions

International openness

Dumb luck?

Does it really matter? Can you be happy and poor? Source: Adrian White, 2006

Can you be happy and poor?