Poverty in Developing Countries

Dr. Geetha VaidyanathanSenior Lecturer

Department of EconomicsUNC- Chapel Hill

You will find that I do not use photos of citizens in the developing world in this presentation. These citizens live their

life with dignity. They experience poverty due to factors beyond their control.

Some Poverty Concepts•What is Poverty? •How is Poverty measured?•What is the incidence of Poverty in developing countries?•What are the Millennium Development Goals (MDGs)?•What is the progress made in MDGs?•What are some contemporary ideas/thoughts about policies to help the poor?

What is Poverty?• Poverty is “Deprivation”. •Absolute Poverty is the deprivation of the basic needs of life. •Relative Poverty is low levels of income and standard of living relative to the average in a society.

How is Poverty Measured?

•Identify the poor using Poverty lines or thresholds.•Individual countries have their own poverty lines.•The World Bank uses two poverty lines at $1.25 per day and $2.00 per day in 2005 purchasing power parity (PPP) to identify the poor.

You probably already know this!

• 1.22 billion people lived on less than $1.25 a day in 2010 compared with 1.94 billion in 1981.

• 2.4 billion people lived on less than US $2 a day in 2010. That is a modest decline from 2.59 billion in 1981.

Using World Population data, can you estimate the proportion of the world population that lived on less that $1.25 a day and $2 a day in 1981 and 2010? Is the improvement significant?

Who are the poor in the U.S.? (www.census.gov)

2013 Poverty Thresholds in the U.S. 

Related children under 18 years

      Size of family unit None One Two       

One person (unrelated individual)       Under 65 years $12,119    65 years and over $11,173   

Two people      

Householder under 65 years $15,600 $16,057 

Householder 65 years and over $14,081 $15,996 

Three people $18,222 $18,751 $18,769

Poverty Measures in Developing Countries

• Headcount: Number of people living below the poverty line.•Headcount ratio/Index: Proportion of the population living below the poverty line•Poverty Gap Index: Average normalized poverty gap. •Squared Poverty Gap Index: Average normalized squared poverty gap.

The Foster-Greer-Thorbecke (FGT) index

1

1 Hp i

i p

Y YP

N Y

N is the population size, H is the headcount of poor persons, and α ≥0 is a parameter Yp is the poverty line and Yi is the income of the poor persons.When α=0, we get the headcount index When α=1, we get the Poverty Gap IndexWhen α=2, we get the Squared Poverty Gap Index

An example to understand the usefulness of these poverty measures

Headcount, Headcount ratio, Poverty Gap Index and Squared Poverty Gap index are commonly used poverty measures by the World Bank . Which ones are the same and which ones differ in the two populations, A and B if a poverty line of 3 is used?

A’s citizens’ incomes are{1,2,2,10,10} B’s citizens’ incomes are {1.5,1.5,2,10,10}

Headcount Ratio/Index of Extreme Poverty (2008)

www.worldbank.org

Headcount Ratio/Index of Extreme Poverty (1987)

www.worldbank.org

Look at the two previous graphs again to answer these questions

What do you notice about the change in headcount ratio between 1981 and 2008 in the six developing regions? Did all the countries make progress during this period? In which regions has headcount ratio changed the most? What are some likely reasons for it?

Poverty Measures in a sample of countries

Source: Economic Development by Todaro and Smith

Multidimensional Poverty Index (MPI)

• MPI focuses on deprivations in health, education, and standard of living; and each receives equal (that is one-third of the overall total) weight.

• A total of 10 dimensions are included in MPI.• First, cutoff levels within each dimension is used

to identify the deprivation.• Second, cutoff in the number of dimensions in

which a person must be deprived (below a line) to be deemed multidimensionally poor.

Ten Dimensions of MPI• Health – two dimensions with equal weight (each counts as one-sixth

toward the maximum deprivation in the MPI) – whether any child has died in the family– whether any adult or child in the family is malnourished –weighted equally

• Education - two dimensions with equal weight (each counts one-sixth toward the MPI). – whether no household member completed 5 years of schooling– whether any school-aged child is out of school for grades 1 through 8

• Standard of Living, equal weight on 6 deprivations (each counts as 1/18 toward the MPI): – lack of electricity– insufficiently safe drinking water– inadequate sanitation– inadequate flooring– unimproved cooking fuel– lack of more than one of 5 assets – telephone, radio, TV, bicycle, and

motorbike.

Steps to calculate MPI

• The weighted average of deprivations is first calculated.

• The poor are identified using a poverty line of 3.33

• Headcount ratio (H) is then calculated.• Average intensity of deprivation A (the percent

of weighted indicators for which poor households are deprived on average).

• MDPI is the multiple of H and A

Calculation of MPI and Ranking of countries by MPI

• http://hdr.undp.org/sites/default/files/hdr_2013_en_technotes.pdf

• https://data.undp.org/dataset/Table-5-Multidimensional-Poverty-Index/7p2z-5b33

What are the “Millennium Development Goals”? ((http://www.undp.org/mdg/))

• MDGs are eight goals contained in the Millennium Declaration defined during the 2000 Millennium Summit and adopted by 189 countries. 147 countries have signed the declaration.

• The MDGs can be broken down to 21 quantifiable targets and measured by 60 indicators.

The eight MDGs

• Goal 1: Eradicate extreme poverty and hunger.• Goal 2: Achieve universal primary education.• Goal 3: Promote Gender equality and empower

women.• Goal 4: Reduce child mortality.• Goal 5: Improve maternal health.• Goal 6: Combat HIV/AIDS, malaria and other

diseases• Goal 7: Ensure environmental sustainability.• Goal 8: Develop a global partnership for

development.

Some Popular Ideas to fight Poverty

• Foreign Aid – Jeffrey Sachs, Melinda and Bill Gates (Gates foundation)•Foreign Investment – Dambisa Moyo•Microfinance, Social Business – Mohammad Yunus•Randomized Controlled Experiments to determine the type of intervention – Abhijit Banerjee and Esther Duflo

How is the progress in MDGs?

• The developing world has already attained the first Millennium Development Goal target to cut the 1990 poverty rate in half by 2015.

• According to Worldbank estimates, 21 percent of people in the developing world lived at or below $1.25 a day. That’s down from 43 percent in 1990 and 52 percent in 1981.

MDG Progress Reports

MDG Progress Reports can be found at UNDP’s website:

http://www.undp.org/content/undp/en/home/librarypage/mdg/mdg-reports/

Some highly recommended books for enrichment!

• Abhijit Banerjee and Esther Duflo. “Poor Economics: A Radical Rethinking of the Way to Fight Global Poverty”

• Paul Collier. “The Bottom Billion: Why the Poorest Countries are Failing and What Can Be Done About It”.

• William Easterly. “The White Man's Burden”• D. Landes. “The Wealth and Poverty of Nations: Why Some Are So Rich &

Some So Poor”• Dambisa Moyo. “Dead Aid: Why Aid Is Not Working and How There Is a

Better Way for Africa”.• Jeffrey Sachs. “The End of Poverty: Economic Possibilities for Our Time”.• Amartya Sen, “Development as Freedom”• Mohammad Yunus, “Building Social Business: The New Kind of Capitalism

That Serves Humanity Most Pressing Needs”

Bibliography1. Poor Economics: A Radical Rethinking of the

Way to Fight Global Poverty by Abhijit Banerjee and Esther Duflo

2. “Economic Development” by Michael P. Todaro and Stephen C. Smith, 11th edition

3. www.census.gov4. www.undp.org5. www.worldbank.org