Measuring Extreme Poverty

Discussion

Jason Hickel and Dylan Sullivan:

"In recent years, scholars have developed a more empirically robust approach to measuring extreme poverty, which compares incomes against the cost of basic needs in different contexts (Moatsos 2016; Moatsos 2021; Allen 2017). Allen calculates what he calls a ‘basic needs poverty line’ (BNPL) in all countries with available data in the year 2011. This poverty line is based on the local price of purchasing specific necessities: 2,100 calories per day, plus 50g of protein, 34g of fat, various vitamins and minerals, some clothing and heating, and 3 square metres of housing. He then compares household income data against the price of this basket in each country, to estimate the share of the population that is unable to meet their basic needs. This approach more closely approximates what the original concept of “extreme poverty” was intended to measure. In a recent paper published by the OECD, Michalis Moatsos extended Allen’s estimates, with robust data for the years between 1980 and 2008, although precise coverage varies by country (Moatsos 2021).

The basic-needs approach to measuring poverty sometimes yields dramatically different results from the World Bank method, depending on the provisioning systems that are in place. This is clear in the case of China, which we explored in a recent paper, and which provides an important example (Sullivan et al., 2023, Sullivan and Hickel, 2023). The World Bank’s method suggests that extreme poverty was very high during the socialist period, and declined during the capitalist reforms of the 1990s, going from 88% in 1981 to zero by 2018. However, the basic-needs approach tells a very different story. From 1981 to 1990, when most of China’s socialist provisioning systems were still in place, extreme poverty in China was on average only 5.6%, much lower than in other large countries of similar GDP/capita (such as India and Indonesia, where poverty was 51% and 36.5% respectively), and lower even than in many middle-income countries (like Brazil and Venezuela, where poverty was 29.5% and 32%, respectively). China’s comparatively strong performance, which is corroborated by data on other social indicators, was due to socialist policies that sought to ensure everyone had access to food and housing at an affordable price. However, during the capitalist reforms of the 1990s, poverty rates rose dramatically, reaching a peak of 68%, as public provisioning systems were dismantled and privatization caused the prices of basic necessities to rise, thus deflating the incomes of the working classes.

The China example underscores the key role that public provisioning and price controls can play in eliminating poverty. It also reveals an interesting paradox. In 1981 China had a GDP per capita of less than $2,000 (2011 PPP), and yet achieved lower rates of extreme poverty than capitalist countries in the periphery with five times more income. During the following decades, China achieved rapid GDP growth, and PPP incomes increased. This growth was beneficial in many respects, for the general development of China’s productive forces. And yet extreme poverty, as measured in terms of access to basic necessities, worsened. For all of the 1990s and the first decade of the 2000s, China had a worse poverty rate compared to the 1980s, despite having markedly higher GDP per capita and higher PPP incomes across the board.

The China example is striking but it is not unique. The OECD data on basic needs shows that many countries experienced rising poverty rates alongside GDP growth during the process of forced liberalization in the 1980s and 1990s. Between 1985 and 1998, the share of the Indonesian population in extreme poverty increased from 23% to 71%, even though GDP/cap rose by 66%. Similarly, in Brazil, the extreme poverty rate increased from 11% in 1980 to 15% in 2005, while GDP/cap rose by 37%. In Kyrgyzstan, GDP/cap increased by 17% from 1995 to 2000, suggesting that living standards had begun to recover from the economic crisis of the early 1990s. But the extreme poverty rate continued a steep climb during that period, rising from 36% to 80% (for perspective, the recorded poverty rate in 1991 was 0%).

In all these cases, poverty increased because people’s gains in PPP-based incomes were outstripped by the rising cost of basic needs."

(https://www.sciencedirect.com/science/article/pii/S2452292924000493)

Needs-Based Anti-Poverty Production Strategies

Jason Hickel and Dylan Sullivan:

"The needs-based poverty metric illuminates much smarter strategies for development. Once we understand that ending poverty is a matter of ensuring people can access the goods and services necessary to meet their needs, then the objective should be to increase production of those specific goods and services. So far we have referred to the goods that comprise the basic needs poverty line (food, shelter, clothing, fuel), but – as we will see in the next section – the same principle applies to the higher-order goods that are required to achieve decent-living standards (nutritious food, modern housing, healthcare, education, electricity, clean-cooking stoves, clothing, washing machines, sanitation systems, refrigeration, heating/cooling, computers, mobile phones, internet, transit, etc), which requires a higher level of industrial output.

In addition to drawing our attention to specific forms of production, the needs-based approach to poverty also draws our attention to prices. At any given level of production, poverty can be reduced by lowering the prices of essential goods, such as food, health care, and public transit. As the case of China illustrates, this can be achieved through policies of public provisioning and price controls, to ensure universal access to essential goods and services. This is critical to successful development strategy, and opens up important new possibilities. Of course, the objective of ensuring accessible prices is inseparable from the objective of shifting output from luxury items toward necessary goods, as this shifts the relevant supply curve to the right.

These strategies were understood by the socialist and anti-colonial movements of the mid-20th century, and indeed by the architects of the welfare state in the core economies during the same period. It was also understood by Simon Kuznets, the economist who invented GDP, who noted: “given the variety of qualitative content in the over-all quantitative rate of economic growth, objectives should be explicit: goals for ‘more’ growth should specify more growth of what and for what. It is scarcely helpful to urge that the over-all growth rate be raised to x percent a year, without specifying the components of the product that should grow at increased rates…” (Kuznets 1962, emphasis added). This is a clarity that urgently needs to be recovered."

(https://www.sciencedirect.com/science/article/pii/S2452292924000493)