We measure relative poverty in rich countries; absolute poverty in poor ones – what if we combine them?

August 31, 2011 7 By admin

Martin Ravallion, the World Bank’s head of research, has been doing some interesting thinking on poverty lines. We currently have an Ravallionodd divide between poor countries, where absolute measures are more often used (eg $1.25 a day, the current international poverty line) and rich countries, which tend to use measures of relative poverty. For example, in Western Europe (including the UK) the poverty line is set at a constant proportion (typically 60%) of median income. Ravallion calls this a “strongly relative line”.

Ravallion argues that both approaches make sense – an absolute line in establishing who is able to feed and clothe themselves, a relative line in determining whether people feel socially excluded or not. In very poor countries, absolute survival plays a bigger role, but as countries’ average wealth rises, so social inclusion, and thus relative poverty, becomes more salient.

However, Ravallion argues that social exclusion matters even in the poorest imaginable country. So a sensible poverty line cannot simply rise and fall proportionately to average income, as in the strongly relative poverty lines used in Europe. Look at Ravallion’s graph. The strongly relative line keeps falling toward zero. The strongly relative lines will be too low (below survival levels) in poor countries. Ravallion says we need “weakly relative lines” which incorporate an absolute minimum, as in the bold line in his graph.

Ravallion graph

In a paper with Shaohua Chen published in the Review of Economics and Statistics, he puts some numbers on this (and lots of equation which were way above my head, so thanks to Martin for helping me make sense of it to write this post……). Up to an average national consumption of $2 per day, he sticks with absolute measures – anyone under $1.25 is poor. But then he switches to a relative measure – above $2 a day, the poverty line slopes upwards, reflecting the importance of social inclusion (see graph). The graph slopes up with a gradient of a third – less than the 60% of the UK strongly relative poverty line. Chen and Ravallion use data on national poverty lines across countries to set this schedule—the same data they had used to select the $1.25 a day line.

What do they find?

‘The trend decline in the incidence of relative poverty has not been sufficient to reduce the number of poor by this measure, which rose from 2.3 billion to 2.6 billion over 1981 to 2005 (see table 1). The turning point is around 1987.’

This contrasts with the more standard measures of absolute poverty, which have the numbers of poor people falling both as a % and in absolute numbers to 1.4bn people by 2005.

Why the disparity between the two (a rising absolute number of relatively poor, and a falling number of absolute poor)? As the global economy grows, poverty lines start to rise to reflect the higher costs of social inclusion, which puts a brake on the pace of relative poverty reduction, despite falling absolute poverty.

More background in Martin’s World Bank blogpost.