Poverty Fault Lines: Towards an Understanding Persistent Poverty

Some of the biggest (and perhaps most meaningless) news is in the cycle again. In late September the world leaders signed an ambitious pledge to “eradicate extreme poverty for all people everywhere by 2030”. Next, the World Bank “moved the goalposts” by increasing the global poverty line from $1.25 per day to $1.90 per day. This is big news because it’s important to understand why these sorts of things happen, but it’s potentially meaningless because these ambitious pledges and new definitions don’t effectively change anything for those actually living in poverty around the world.

I don’t want to write about why the World Bank redefined the poverty line (that has already been written about, in depth). I want to write about what poverty lines tell us, what they don’t, and how they can be improved.

Poverty lines allow us to define a population as “poor” and “non-poor” at a single point in time. By establishing a money metric poverty line and collecting data on household consumption or expenditures or income researchers and policymakers are able to calculate the proportion of a given population that is (strictly speaking) poor. Furthermore by using the standard Foster-Greer-Thorbecke measurements we are able to calculate both the extent and depth of poverty within a population. To be clear, these calculations (done well) are very informative and useful. When representative surveys are repeated we are able to understand the evolution of poverty within a society over time.

However, this sort of poverty measurement is unable to disentangle two very different types of “the poor”. Take an example from Carter and Barrett (2006):

Say, a 33 percent poverty headcount ratio could reflect a society in which the same one-third of individuals are persistently poor, period after period. In such a society, poverty would be experienced by only a minority, but intensely and indefinitely for those unlucky few. Alternatively, repeated observations of the same headcount could reflect a reality in which poverty is a purely transitory phenomenon in which individuals routinely swap places on the basis of random outcomes, or perhaps based on age or other demographic process. Over time, all households would be poor one-third of the time, thus all would share the burden of poverty equally and only for a minority of the time.

Clearly these two types of societies are very different. In the first we’d be worried about hopelessness and fatalistic behavior in a relatively large subgroup of the population. In the second, poverty is simply a step on the road to prosperity. A typical poverty line measurement can not distinguish between these two extremes. This is a problem if you’re a policymaker who cares about this distinction and wants to inform policy to prevent the first case from obtaining.

One way of working around this problem is repeatedly surveying the same exact households, but this method is commonly hampered by challenges tracking down households period after period. If the panel is rife with attrition, even the fanciest analysis won’t be able to draw reasonable results. Even if we were able to find the same exact households year after year after year, there would still be issues. Simply observing a transition out of poverty is unsatisfying to policymakers because we fail to understand how the individual transitioned out of poverty. Some may have transitioned due to good or bad luck others because they have accumulated a new set of assets and their private returns are now enhanced. Again, the implication for policy between these two transitions out of poverty are drastically different.

To overcome these issues Carter and Barrett (2006) and Barrett and Carter (2013) suggest including a dynamic asset poverty line. Identifying this so-called Micawber Threshold allows researchers and policymakers to distinguish between who is likely to escape poverty on their own given the correct amount of time and who is effectively trapped in poverty.

While none of this is new, it bares importance in light of all the discussion about the United Nations “Sustainable Development Goals” and the World Bank’s new definition of “extreme poverty”. It is only by empirically identifying this dynamic asset poverty line will we actually be able to understand the moral and economic efficiency imperatives of poverty in our world today and into the future.

References for further reading:

Barrett C.B. and Carter M.R. (2006) “The Economics of Poverty Traps and Persistent Poverty: An Asset-Based Approach” The Journal of Development Studies, 42 (2) pp. 178-199.

Carter M.R. and Barrett C.B. (2013) “The Economics of Poverty Traps and Persistent Poverty: Empirical and Policy Implications” The Journal of Development Studies, 49 (7) pp. 976-990.

Kraay A. and McKenzie D. (2014) “Do Poverty Traps Exist? Assessing the Evidence” Journal of Economic Perspectives, 28 (3) pp. 127-148.

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