Transformational Growth andTransformational Growth and Monetary Poverty: An approach for

inter-country and inter-temporal comparisonscomparisons

Enrique Delamonica

UNICEF, Social and Economic Policy Advisor (Latin America & Caribbean)

CROP Fellow (Comparative Research Programme on Poverty)

StructureStructure

1) Introduction)2) Some problems with “International Poverty Lines”

)3) Absolute Poverty, Relative Poverty and Income Distribution through time4) A discussion of conceptual definitions4) A discussion of conceptual definitions5) Transformational Growth and the variation of the poverty line through timep y g6) Capabilities and International Comparisons7) Summary and Conclusions

Some problems with “International Poverty Li ”Lines”

• Modern Income (consumption) definitions of povertyModern Income (consumption) definitions of poverty

“A person is poor in any period if, and only if, her or his access to economic resources is insufficient to acquire enough commodities to meet basic material needs adequately.” (Lipton, 1997)

“Poverty… lack of command over basic consumption needs, and the poverty line [is] the cost of those needs” (Ravallion and Bidani, 1994)

• Based on the work of Rowntree at the turn of the• Based on the work of Rowntree at the turn of the century and Orshansky in the 1960s

National vs international poverty lineNational vs international poverty linePer capita income and poverty lines

100

80

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nce

20

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40Inc

0

10

issau

geria

duras

kistan

pines

China

Peru RepBraz

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mbia exico iland

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aysia

Chile

Guinea

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pppi Ch P

Dom R Br

Cost

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Malay C

US$1 - PPP National PL Linear (US$1 - PPP) Linear (National PL)

Source: World Bank (1998) and ECLAC (1998) 17 countries

1US$ a day: Origins1US$ a day: Origins

4800

360042004800

ne

180024003000

over

ty L

in

60012001800

Po

00 1200 2400 3600 4800 6000 7200 8400 9600 10800

Mean consumption (GNPpc)

1US$ a day: Origins1US$ a day: Origins

4800

Enlarged view600

360042004800

ne

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0

180024003000

over

ty L

in

0 300 600 900 12000

60012001800

Po

00 1200 2400 3600 4800 6000 7200 8400 9600 10800

Mean consumption (GNPpc)

National vs international poverty lineNational vs international poverty line

Cost of basic foodbasket (national PL)

International Poverty Line

Cost of basic food

International Poverty Line

Cost of basic foodbasket (national PL)

Incidence according to the National PLand the International Poverty Line

2/31/3

1/32/3

Some examplesSome examples

National PL 1US$ a dayAlgeria 22.6 Less than 2gAzerbaijan 68.1 Less than 2China 4 6 18 5China 4.6 18.5Egypt 22.9 3.1Indonesia 27 1 7 7Indonesia 27.1 7.7Sri Lanka 25.0 6.6T i id d & T 21 0 12 4Trinidad & T 21.0 12.4

Absolute Poverty, Relative Poverty and Income Distribution through time:Income Distribution through time:

Reducing poverty, increasing disparitiesIIncome

PovertyLine

Income poverty = 20%Income poverty = 40%

Absolute Poverty, Relative Poverty and Income Di ib i h h iDistribution through time

75252015105T1

Total54321

75252015105T1

Absolute Poverty, Relative Poverty and Income Di ib i h h iDistribution through time

75252015105T1

Total54321

75252015105T1

(ABSOLUTE) POVERTY LINE = 12

Absolute Poverty, Relative Poverty and Income Di ib i h h iDistribution through time

75252015105T1: Absolute poverty = 40%

Total54321

75252015105T1: Absolute poverty 40%

(ABSOLUTE) POVERTY LINE = 12

Absolute Poverty, Relative Poverty and Income Di ib i h h iDistribution through time

75252015105T1: Absolute poverty = 40%

Total54321

2008051351915T2 : Absolute poverty = 0%

75252015105T1: Absolute poverty 40%

(ABSOLUTE) POVERTY LINE = 12

Absolute Poverty, Relative Poverty and Income Di ib i h h iDistribution through time

75252015105T1: Absolute poverty = 40%

Total54321

2008051351915T2 : Absolute poverty = 0%

75252015105T1: Absolute poverty 40%

(ABSOLUTE) POVERTY LINE = 12(RELATIVE) POVERTY LINE = 1/2 of average income

Absolute Poverty, Relative Poverty and Income Di ib i h h iDistribution through time

75252015105T1: Absolute poverty = 40%

Total54321

2008051351915T2 : Absolute poverty = 0%

75252015105T1: Absolute poverty 40%

(ABSOLUTE) POVERTY LINE = 12(RELATIVE) POVERTY LINE = 1/2 of average income

T1: 75/5 = 15, thus (relative) poverty line = 7 1/2 & Relative Poverty = 20%T2: 200/5 = 40, thus (relative) poverty line = 20 & Relative Poverty = 40%

Temporary conclusionTemporary conclusion

Absolute poverty is better, conceptually, than p y , p y,relative poverty

But absolute poverty is not absolute

A discussion of conceptual definitionsA discussion of conceptual definitions

“Every man is rich or poor according to the y p gdegree in which he can afford to enjoy the necessities, conveniences and amusements of human life”

(Adam Smith, 1776).

A discussion of conceptual definitionsA discussion of conceptual definitions

“The power of the labourer to support himself, p pp ,and the family which may be necessary to keep up the number of labourers, does not depend on the quantity of money which he may receive for wages, but on the quantity of food, necessaries and conveniences becomenecessaries, and conveniences become essential to him from habit, which that money will purchase”will purchase

(David Ricardo, 1817).

A discussion of conceptual definitionsA discussion of conceptual definitions

“There enters into the determination of the value of labour-power a historical and moral element. Nevertheless, in a given country, at a given period, the average quantity of the means of subsistence necessary for the labourer is practically known”labourer is practically known

(Karl Marx, 1867).

Transformational GrowthTransformational Growth

Ontology: Steady State Economic Growth doesOntology: Steady State Economic Growth does not exist

Economic Growth is irregularEconomic Growth is irregular

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1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20

Transformational GrowthTransformational Growth

Ontology: Steady State Economic Growth doesOntology: Steady State Economic Growth does not exist

Economic Growth is irregularEconomic Growth is irregular

However, it is not random

“Old” and “New “ economic cycle

Different types of cycles for different periods yp y p(characterized by institutions, technology and market structures))

Transformational GrowthTransformational Growth

100

120

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20

40

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However, it is not random

0

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20

“Old” and “New “ economic cycle

Different types of cycles for different periodsDifferent types of cycles for different periods (characterized by institutions, technology and market structures)market structures)

Transformational Growth (continued)Transformational Growth (continued)

Institutions technology and market structuresInstitutions, technology and market structures are not completely independent of each other

They are also endogenous to the TG processThey are also endogenous to the TG process (from “Size of the market determines division of labor” to “size of aggregate demand influences economically viablesize of aggregate demand influences economically viable

technology and market structure”)

Income distribution changes along TG processIncome distribution changes along TG process

Consumption patterns change along TG process

Transformational Growth and the definition of h lithe poverty line

As new Goods and Services (G&S) are introducedAs new Goods and Services (G&S) are introduced and diffused consumption patterns change.

First they may be luxuries eventually they become aFirst they may be luxuries, eventually they become a “must have”.

I i h TG h d i hi h G&SIt is the TG process that determines which G&S are necessities, amusement and conveniences morally

d b h bi i i baccepted by habit as minima not to be poor

Transformational Growth and the variation of h li h h ithe poverty line through time

Poverty line changes but not automatically There isPoverty line changes but not automatically. There is no specified income-elasticity precisely because TG and the concomitant income distribution areTG and the concomitant income distribution are not steady

“War on Poverty” cannot be won once and for allWar on Poverty cannot be won once and for all.

It is continuous as economies evolve and new i d d dconsumption products and patterns emerge and

are diffused

Capabilities and International ComparisonsCapabilities and International Comparisons

Sen’s Capabilities (Functionings) occupy aSen s Capabilities (Functionings) occupy a middle space between utility and commoditiescommodities.

Supposedly better than either for interpersonal comparisons and distributive assessmentscomparisons and distributive assessments

Extremely difficult to measure in practice

Diverse and contradictory literature and “lists”

Capabilities and International Comparisons (II)Capabilities and International Comparisons (II)

Clearest point (after debate with Townsend):Clearest point (after debate with Townsend): Although “Capabilities” may be universal and absolute the way to fulfill them vary withabsolute, the way to fulfill them vary with time and space

I e Absolute poverty is not absolute whenI.e. Absolute poverty is not absolute when comparing across countries

M i bili iMost attempts at measuring capabilities are static (unlike TG) due to inter-country focus

Summary and Conclusions“International poverty line” is a mirage

unless it is grounded on attaining minimum standard of living in every country

Absolute Poverty is a better measure than Relative Poverty

Absolute Poverty is not absolute

It varies in time and spaceIt varies in time and space

Variation is not haphazard, it is grounded in TG process

Thus poverty lines should be recalculated periodicallyThus, poverty lines should be recalculated periodically (e.g. every 10 years) based on “practical knowledge”

Redistributive policies constantly neededRedistributive policies constantly needed