International Poverty

Slide 1: International Poverty February 2007 Dale DeBoer CU-Colorado Springs

Slide 2: 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 February 2007 Dale DeBoer CU-Colorado Springs

Slide 3: Making the global comparison ► What is the “economic unit”? ► Adjusting for currency differences  Exchange rate conversion  P(urchasing) P(ower) P(arity) conversion February 2007 Dale DeBoer CU-Colorado Springs

Slide 4: 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 February 2007 Dale DeBoer CU-Colorado Springs

Slide 5: $14,000 $12,000 $10,000 $8,000 Billion $6,000 $4,000 $2,000 $0 China Japan USA Source: World Bank February 2007 Dale DeBoer CU-Colorado Springs

Slide 6: 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 February 2007 Dale DeBoer CU-Colorado Springs

Slide 7: Then what is the PPP value? ► Use US prices to value Chinese production No Yuan prices employed  No exchange rate employed  February 2007 Dale DeBoer CU-Colorado Springs

Slide 8: $14,000 $12,000 $10,000 $8,000 Billion $6,000 $4,000 $2,000 $0 China Japan USA Source: World Bank February 2007 Dale DeBoer CU-Colorado Springs

Slide 9: Is this value accurate? ► No  but … ► Quality adjustments  Beach front property in Tijuana vs. San Diego ► Financial market weight ► Quality of life assessment February 2007 Dale DeBoer CU-Colorado Springs

Slide 10: Poverty lines $35 $30 $25 $20 $15 $10 $5 $0 US International high International low February 2007 Dale DeBoer CU-Colorado Springs

Slide 11: 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 February 2007 Dale DeBoer CU-Colorado Springs

Slide 12: Example 1 ►A ►C Rich Poor   4% growth 0% growth   No change in poverty 5% increase in poverty   ►B Poor  18% growth  1% fall in poverty  February 2007 Dale DeBoer CU-Colorado Springs

Slide 13: Example 1 ► Average income ► Average poverty  Rich  (0% + 1% - 5%) ÷ 3 = -1.33% ► From $5000 to $5,200  Poverty worsens  Poor ► From $2,000 to $2,090 ► Gap increases February 2007 Dale DeBoer CU-Colorado Springs

Slide 14: Getting the poverty numbers right ► World Bank/UNDP data What does this miss?  Country size & country specific distributional  issues February 2007 Dale DeBoer CU-Colorado Springs

Slide 15: Example 2 ►A ►C Rich Poor   4% growth 0% growth   No change in poverty 5% increase in poverty   1,000 people 500 people   ►B Poor  18% growth  1% fall in poverty  10,000 people  February 2007 Dale DeBoer CU-Colorado Springs

Slide 16: Example 2 ► Average income ► Average poverty  Rich  (0% x 1,000 + 1% x 10,000 - 5% x 500) ÷ 3 ► From $5,000 to $5,200 = 0.6%  Poor  Poverty improves ► From $2,000 to $2,343 ► Gap decreases February 2007 Dale DeBoer CU-Colorado Springs

Slide 17: 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 February 2007 Dale DeBoer CU-Colorado Springs

Slide 18: What do the numbers say? 30% 25% 20% 15% 10% 5% 0% 1970 1987 1998 2003 Source: World Bank February 2007 Dale DeBoer CU-Colorado Springs

Slide 19: What do the numbers say? 30% 25% 20% 15% 10% 5% 0% 1970 1987 1998 2003 Source: World Bank; Sala-i-Martin February 2007 Dale DeBoer CU-Colorado Springs

Slide 20: What do the numbers say? 60% 50% 40% 30% 20% 10% 0% 1970 1987 1998 2003 Source: World Bank; Sala-i-Martin February 2007 Dale DeBoer CU-Colorado Springs

Slide 21: Why has it fallen? ► Growth is good! Source: David Dollar, 2002 February 2007 Dale DeBoer CU-Colorado Springs

Slide 22: Why has it fallen? ► Growth is good! ► China and India February 2007 Dale DeBoer CU-Colorado Springs

Slide 23: What matters? ► Institutions ► International openness ► Dumb luck? February 2007 Dale DeBoer CU-Colorado Springs

Slide 24: Does it really matter? ► Can you be happy and poor? Source: Adrian White, 2006 February 2007 Dale DeBoer CU-Colorado Springs