Part 1:  What Is Poverty and Who Are the Poor?

Concepts

• absolute poverty
• income
• relative poverty
• wealth

National Voluntary Content Standards in Economics

The background materials and student activities in lesson 1, part 1, address parts of the following national voluntary content standards and benchmarks in economics.  Students will learn that:

Standard 13:  Income for most people is determined by the market value of the productive resources they sell.  What workers earn depends, primarily, on the market value of what they produce and how productive they are.

• Changes in the structure of the economy, the level of gross domestic product, technology, government policies, and discrimination can influence personal income.
• Two methods for classifying how income is distributed in a nation – the personal distribution of income and the functional distribution – reflect, respectively, the distribution of income among different groups of households and the distribution of income among different businesses and occupations in the economy.

Standard 15:  Investment in factories, machinery, new technology, and the health, education, and training of people can raise future standards of living.

• Economic growth is a sustained rise in a nation's production of goods and services.  It results from investments in human and physical capital, research and development, technological change, and improved institutional arrangements and incentives.
• Historically, economic growth has been the primary vehicle for alleviating poverty and raising standards of living.

Key Points

1. Overview:  According to the World Bank's World Development Indicators, 2005

   1.1 billion people in the world live in extreme poverty.

   17.5% of the world's population is poor.
   2003 Data. Source

These numbers become useful in discussion of the issue of world poverty only when we know how they were generated and what they mean. 

2. Terms and concepts:
   • The most commonly used measures of poverty are income measures.
   • Incomes are money payments the owners of resources earn for contributing their resources to production.
     • The most familiar category of income is wages and salaries, the income earned by labor. 
     • The other 3 categories are:
       • Rent payments to the owners of natural resources,
       • Interest payments to the owners of capital, and
       • Profit to entrepreneurs, who undertake the risk of productive enterprise.
     • In developed countries, most people receive their income in the form of money, but in impoverished countries especially, in-kind income is predominant.
     • A farmer who plants and harvests grain that his family eats is earning an income; his income is in the form of grain rather than money. 
   • Because production generates income, total production = total income.  Thus, the most common measure of production or output, the GDP (gross domestic product) is also used as a measure of income. 
     • More specifically, GDP is the commonly used measure of total output or total production, and GDP per capita is the commonly used measure of average income or standard of living. 
     • GDP (gross domestic product) is the total value of final output produced annually in a nation. 
     • GDP per capita (gross domestic product per capita) = GDP ÷ population.
       • (GNP, or Gross National Product, and GNI, or Gross National Income, are also used to measure income.  GDP, GNP, and GNI figures for a particular nation differ only slightly.)
     • Income data are frequently used to divide the nations of the world into "high," "middle," and "low" income categories, as shown in Map 1 below.

   Map 1. Countries of the World Divided into Low, Middle, and High Income
   Using per capita GNI (2003):

   

   Source

   • In economic terms, wealth and income are different.
     • Income is a flow of receipts over a period of time – earnings per month or per year.
       • Earning an income allows people to acquire the goods and services that make up their standard of living. 
     • Wealth is an accumulation of past income earned and reinvested.  It is best thought of as a stock of the assets people have acquired.
   • While wealth per capita is not typically used in measuring poverty, it is important to consider that wealth also affects standard of living.
     • For example, income measures of poverty may mistakenly list people as poor because they have low income but enjoy a high standard of living because of their accumulated wealth.
       • A retired person who owns a house and a car and lives an active life with travel and entertainment certainly is not "poor" even though her current income may be limited to social security checks or a small pension.
3. Comparing levels of poverty in different years or different countries requires that the measurement tool(s) be clearly identified and consistent throughout the analysis.  Additionally, valid comparisons can be made only in terms of real (as opposed to nominal) values.
   • Real values are adjusted to eliminate differences that result from inflation.  Comparisons of income over time commonly use a base year of constant purchasing dollar value; for example, the income per person in 1950 and 2004 can be compared by correcting for inflation over that period.
   • Real values also facilitate comparisons among nations. Income data are converted from local currencies to U.S. dollars using a currency exchange measure called Purchasing Power Parity or PPP.
   • The World Bank data in the chart below show 2004 per capita GNI (gross national income) for many of the poorest nations in the world.  Compare the values in the chart to the United States' per capita income of $41,440.
     • Note that all values are stated in U.S. dollars (PPP) to facilitate comparison.
   
   

   Table 1
   2004 GNI per capita for a Sampling of the World's Poorest Nations

   Country capita GNI/cap		Country capita GNI/cap		Country capita GNI/cap
   		USA  $41, 440
   Albania	2,120	Guinea-Bissau	160	Pakistan	600
   Bangladesh	440	Honduras	1,040	Papua New Guinea	560
   Bolivia	960	India	620	Paraguay	1,140
   Burundi	90	Indonesia	1,140	Philippines	1,170
   Cameroon	810	Kenya	480	Rwanda	210
   Central African Rep.	310	Madagascar	290	Senegal	630
   China	1,500	Malawi	160	Sierra Leone	210
   Colombia	2,020	Mali	330	Sri Lanka	1,010
   Cote d'Ivoire	760	Morocco	1,570	Tanzania	320
   Dominican Republic	2,100	Mozambique	270	Uganda	250
   Egypt	1,250	Nepal	250	Ukraine	1,270
   Georgia	1,060	Nicaragua	830	Vietnam	540
   Ghana	380	Niger	210	Zambia	400
   Guatemala	2,190	Nigeria	430	Zimbabwe	620

   Search Data Query: http://devdata.worldbank.org/data-query/
   

   • While income measures are both useful and widely used, they do have shortcomings:
     • Per capita GDP is an average, and therefore depicts the standard of living in very general terms that may hide income disparities within a population.
       • Averages – per capita and all others – smooth out differences in the income of individuals and groups, and thus may not accurately portray the material well-being of large portions, or even a majority, of a nation's citizens.
         • Suppose, in the most extreme instance, that 95% of a country's income went to a ruling family, leaving only 5% for the millions of citizens.  In that case, the general poverty of the population would be hidden by the per capita average.  (See Appendix 1, p. 30.)
4. Income is closely tied to consumption.  It is derived from output and used for consumption or savings (which is merely delayed consumption).  In subsistence economies, where savings are non-existent, current consumption equals output.
   • Consumption (as opposed to output) measurements provide more reliable indicators of standards of living where income data is non-existent or hard to gather.
     • Rather than relying on estimated values or assumptions about the level of material well-being implied by dividing GDP by population, consumption measurement is derived from a statistically significant number of household surveys. The survey data about the goods and services the members of the household actually consume are then converted to monetary values.
   • Many poverty researchers prefer consumption measures to output-based measurement in developing countries because the data are more precise and can be collected without large government outlays.
     • Household surveys also have the advantage of providing a reliable way to account for income-in-kind.
     • China and India – until recently the location of a majority of the world's poor –  have large, accurate household surveys going back several decades. More and more developing countries joined them in this practice in the 1990s.
   • The World Bank's consumption survey is the source of the estimate with which we began the lesson:  that 1.1 billion people, or 17.5% of the world's population, live in extreme poverty.
     • The consumption data in Table 2, below, reinforce the conclusions reached using the income data in Table 1, above.
       

   Table 2

   Consumption Measure of # of Poor by World Region
   Regions	1998 (GEP 2000)	2001 (GEP 2005)
   East Asia and the Pacific (w/ China)	278 million	271 million
   East Asia and the Pacific (excluding China)	65 million	59 million
   East Asia and the Pacific (excluding China)	65 million	59 million
   Eastern Europe and Central Asia	24 million	17 million
   Latin America and the Caribbean	78 million	50 million
   Middle East and North Africa	5.5 million	7 million
   South Asia	522 million	431 million
   Sub-Saharan Africa	291 million	313 million
   Total	1.199 billion	1.089 billion
   Reduction in number of poor, 1998-2001: 110 million

   
   

   Source:  Global Economic Prospects and the Developing Countries, 2001.
   Global Economix Prospects and the Developing Countries, 2005.
   • (Although it is not the focus of this unit, poverty is also frequently measured in terms of social indicators.  For a more complete discussion of social indicators of poverty, see Appendix 2, page 39.)
5. Absolute poverty is conceptually and empirically different from relative poverty.
   • Absolute poverty is identified by designating a minimum threshold of material well-being. The incomes of the poor fall below the minimum threshold.
     • Poverty lines differ among nations, as each designates its own acceptable minimum level of material well-being. 
       • Thus, poverty lines differ markedly from nation to nation and region to region. (In Map 2, below, poverty lines for India and China have been converted to $US to facilitate real purchasing power comparisons.

   Map 2
   Poverty lines, 2001: Income / person / day
   USA; India; China

   
   
   • Relative poverty differs from absolute poverty in that it is identified by comparing levels of material well-being experienced by different individuals or groups, rather than by comparing the level of well-being to a standard.
     • Since income is not equally distributed among all members of a society, some will be relatively poor and others will be, by comparison, relatively rich.
       • ("Is Capitalism Good for the Poor?" focuses on the problem of absolute poverty.  However, a more detailed introduction to relative poverty is included in Appendix 1.)
6. World economic history provides a clear story of decreasing absolute poverty.
   • Historically, changes in absolute poverty have been indicated by a population's increased or decreased ability to acquire particular basic goods and services. 
     • Researchers investigating changes in absolute poverty are interested in questions such as:

     "How many of the world's people had access to clean drinking water in 1700? In 2000?"
     "What was the infant mortality rate in 1700? In 2000?"
     "How has life expectancy changed over the last 100 years?"

   • Beginning around 1750, western economies began to make significant progress in reducing levels of absolute poverty.  (See introductory essay, "A Brief History of Human Progress.")
     • Throughout history, absolute poverty has been the norm.  Only in the past two-and-a-half centuries have some nations reached levels of production leading to marked reduction in poverty. 
       • "If we take the long view of human history and judge the economic lives of our ancestors by modern standards, it is a story of almost unrelieved wretchedness.  The typical human society has given only a small number of people a humane existence, while the great majority have lived in abysmal squalor"  (Rosenberg and Birdzell 3).    
       • The 17^th century philosopher, Thomas Hobbes, memorably described the life of man as "solitary, nasty, brutish, and short." 
     • Modern economic growth began in mid-18^th century Europe, and the ensuing economic progress spread, reducing absolute poverty worldwide.
   • Since 1750, human society has made consistent inroads against absolute poverty, and improvements have been especially noteworthy in the last quarter century.
     • For the first time in human history, we are experiencing a sustained decline not only in the percentage of the world's population that is poor, but in the total number of the poor. 
     • While it is true that for centuries as population grew, so did the total number of poor, it's important to acknowledge that the increases were not proportional. The percentage of people living in poverty declined as increasing food supplies more than kept pace with increasing population.  (See Figure 1, below.)

       Figure 1

       

       Source: Dollar, David. "Capitalism, Globalization and Poverty." World Bank, 2003.

     • Records from 1820 lack precise income and standard-of-living indicators, but the vast majority of people were subsistence farmers whose total consumption would be valued at less than $1/day at current prices.
       • Since the early 1800s, the proportion of people living in extreme poverty has declined from 80% to about 20%, with most of the decrease occurring – as Figure 1 shows – during the 20^th century.
   • While the percentage of people living in poverty fell continuously over the 200 year span following 1800, it is true that until very recently, the total number of poor people continued to grow as world population grew.  (See Figure 2, below.) Recently, however, even that barrier to reducing absolute poverty has fallen.
   • The number of poor in the world peaked around 1980 at an estimated 1.4 billion.
     • After 1980, population growth in the world was not sufficient to offset the decline in the percentage of people in poverty, so that not only the percentage but the absolute number of the poor began to fall.
   • Globally, the number of extreme poor – those living on less than $1/day – has declined by 200 million people since 1980.

   Figure 2

   

   Source: Dollar, David. "Capitalism, Globalization and Poverty." World Bank, 2003.

   • Recent reductions in absolute poverty have not been uniform worldwide.  World totals hide significant regional differences:
     • The decline in the poverty numbers relies completely on developments in China and India.
       • Measured against their own poverty lines (see Map 2, p. 8), China and India have experienced declines in both the number and percentage of the poor (see Figure 3, below).
         • According to household surveys in China, the number of people with incomes below the Chinese national poverty line declined from 250 million in 1978 to 34 million in 1999.  Over 200 million people were raised out of poverty during that 20 year time period.
           • Importantly, this decline occurred during a time of rapid population growth. Thus, the percentage of the population that is poor dropped from 27% to 3%.
           • Similarly, in India, population survey data reveals a decline from 330 million poor (51% of the population) in 1980 to 259 million (25% of the population) in 1999.

   Figure 3

   

   Source: Dollar, David. "Capitalism, Globalization and Poverty." World Bank, 2003.

   • On the other hand, as the regional comparison below indicates, the number of poor in Africa increased over the same period.

   Table 3

   	Number of People Living on Less than $1/day (millions)
   	1987	1990	1998	2001
   East Asia & Pacific	417.5	452.4	267.1	261.2
   Sub-Saharan Africa	217.2	242.3	301.6	315.0

   Source: http://www.worldbank.org/poverty/data/trends/income.htm#table1 and http://iresearch.worldbank.org/PovcalNet/jsp/index.jsp

   • African countries, consistently and in great disproportion, occupy the bottom positions in standard of living rankings of world nations. (See Table 1, p.5, above.)
   • In summary, world trends in extreme (absolute) poverty are primarily a combination of poverty reduction in Asia and poverty increases in Africa.  The much larger reductions in Asia result in a net reduction worldwide.
     • Impressive poverty reduction in Asia has occurred not only in China, but also in Vietnam, Indonesia, and to a lesser extent Bangladesh. 
     • With sadly few exceptions, African countries have experienced little or no poverty reduction over the past two decades.


7. Economic growth is the key to reducing absolute poverty.
   • There are two methods of reducing the number of poor:  one is to redistribute income from the rich to the poor, and the other is economic growth.
     • Using a pie analogy helps to explain the two alternatives.  (See Figures 4 and 5.)
       
       
       • If we think of the economy as a pie, reducing poverty by redistributing income (reducing income inequality) is analogous to giving the poor a bigger slice of the pie (see Figure 4), while reducing poverty through economic growth means making the pie bigger.  When that happens, the poor have a bigger slice even if the relative size of the slices doesn't change.  (See Figure 5.)

   Figure 4
   Redistribution reduces poverty by giving the poor a bigger "slice of the pie"...  

   

   Figure 5
   Economic Growth improves the lives of the poor by making the pie bigger
   Bigger "slices" mean higher standards of living

   
   
   
   • The case for redistribution is based on the persistence of a significant income gap between the rich and poor in market economies. University of California Professor Roger Ransom explains that this perspective emphasizes the importance of a relative definition of poverty, in which perceptions of poverty are based on people's comparisons of their own material well-being to that of others around them.
     
     
     

     "The definition of who is "poor" must ultimately depend on the relative standing of people in their own community . . . . the "poor" as those who are in a situation where their income . . . places them at the bottom of the income and wealth distribution."  (Ransom 1)

     
     
   • Ransom warns, eloquently and convincingly, that if economic growth assures a minimal level of well-being while allowing great disparities in living standards, it fails to adequately address poverty.
   
   
   • Pointing to the United States, he notes the persistence of income inequality in our nation's history.
   • There has been no evidence of long-term decline in income inequality in the past 150 years.
   • Among developed countries, the United States ranks near the bottom in terms of the percent of income going to the poorest 10% of the population.

   As noted above by Prof. Richard Ransom, the United States ranks near the bottom in the percentage of national income (1.8%) received by the poorest 10% of the population.  Only New Zealand, at .3% ranks lower.

"The argument that economic growth unambiguously helps the poor focuses attention on the provision of some basic level of 'wants.'  Nonetheless, while capitalism may have made a great many people much better off, it has not removed the wide disparity of choices available within societies.  Lost amid the acclaim for capitalism as a successful engine of growth is the unnerving fact that the expansion of output has not benefited everyone equally, and growth has been very uneven."  (Ransom 3)

Table 4

Top Quintile of Nations	Average GNI per capita	lowest 10% share	lowest 20%
Norway	51,810	3.9	9.6
Switzerland	49,600	2.6	6.9
United States	41,440	1.9	5.4
Denmark	40,750	2.6	8.3
Japan	37,050	4.8	10.6
Sweden	35,840	3.6	9.1
Ireland	34,310	2.8	7.1
United Kingdom	33,630	2.1	6.1
Finland	32,880	4.0	9.6
Austria	32,280	3.1	8.1
Netherlands	32,130	2.5	7.6
Belgium	31,280	2.9	8.3
Germany	30,690	3.2	8.5
France	30,370	2.8	7.2
Canada	28,310	2.5	7.0
Australia	27,070	2.0	5.9
Hong Kong, China	26,660	2.0	5.3
Italy	26,280	2.3	6.5
Singapore	24,760	1.9	5.0
Kuwait	22,470	2.9	7.9
Total	669,610	56.4	150.0
Average (total/20)	33,481	2.8	7.5
Second Quintile of Nations
Spain	21,530	2.8	7.5
New Zealand	19,990	2.2	6.4
Israel	17,360	2.4	6.9
Greece	16,730	2.9	7.1
Slovenia	14,770	3.6	9.1
Portugal	14,220	2.0	5.8
Czech Republic	9,130	4.3	10.3
Trinidad and Tobago	8,730	2.1	5.5
Hungary	8,370	4.0	9.5
Estonia	7,080	1.9	6.1
Croatia	6,820	3.4	8.3
Mexico	6,790	1.0	3.1
Slovak Republic	6,480	3.1	8.8
Poland	6,100	3.1	7.6
Lithuania	5,740	3.2	7.9
Latvia	5,580	2.8	7.3
Chile	5,220	1.2	3.3
Malaysia	4,520	1.7	4.4
Costa Rica	4,470	1.4	4.2
Botswana	4,360	0.7	2.2
Total	193,990	49.8	131.3
Average (total/20)	9,700	2.5	6.6
Middle Quintile of Nations
Panama	4,210	0.7	2.4
Venezuela , RB	4,030	0.6	3.0
Uruguay	3,900	1.8	4.8
Turkey	3,750	2.3	6.1
South Africa	3,630	1.4	3.5
Argentina	3,580	1.0	3.1
Russian Federation	3,400	3.3	8.2
Jamaica	3,300	2.7	6.7
Brazil	3,000	0.7	2.4
Romania	2,960	3.2	7.9
Bulgaria	2,750	2.4	6.7
Tunisia	2,650	2.3	6.0
Thailand	2,490	2.5	6.1
Macedonia , FYR	2,420	3.3	8.4
Namibia	2,380	0.5	1.4
Peru	2,360	0.7	2.9
Iran , Islamic Rep.	2,320	2.0	5.1
El Salvador	2,320	0.9	2.9
Algeria	2,270	2.8	7.0
Ecuador	2,210	0.9	3.3
Jordan	2,190	3.3	7.6
Total	62,120	39.3	105.5
Average (total/21)	2,958	1.9	5.0
Fourth Quintile of Nations
Guatemala	2,190	0.9	2.6
Albania	2,120	3.8	9.1
Dominican Republic	2,100	2.1	5.1
Colombia	2,020	0.8	2.7
Morocco	1,570	2.6	6.5
China	1,500	1.8	4.7
Ukraine	1,270	3.7	8.8
Egypt , Arab Rep.	1,250	3.7	8.6
Philippines	1,170	2.2	5.4
Paraguay	1,140	0.6	2.2
Indonesia	1,140	3.6	8.4
Georgia	1,060	2.3	6.4
Honduras	1,040	0.9	2.7
Sri Lanka	1,010	3.4	8.3
Bolivia	960	1.3	4.0
Nicaragua	830	2.2	5.6
Cameroon	810	2.3	5.6
Cote d'Ivoire	760	2.0	5.2
Senegal	630	2.6	6.4
Zimbabwe	620	1.8	4.6
India	620	3.9	8.9
Total	25,810	48.5	121.8
Average (total/21)	1,229	2.3	5.8
Bottom Quintile of Nations
Pakistan	600	3.7	8.8
Papua New Guinea	560	1.7	4.5
Vietnam	540	3.2	7.5
Kenya	480	2.5	6.0
Bangladesh	440	3.9	9.0
Nigeria	430	1.6	4.4
Zambia	400	1.0	3.3
Ghana	380	2.1	5.6
Mali	330	1.8	4.6
Tanzania	320	2.8	6.8
Central African Republic	310	0.7	2.0
Madagascar	290	1.9	4.9
Mozambique	270	2.5	6.5