Absolute Poverty: When Necessity Displaces Desire by Robert C. Allen Global Distinguished Professor of Economic History

Robert C. Allen ‘Absolute Poverty: When Necessity Displaces Desire’ A new basis for an international poverty measurement is proposed based on linear programming for specifying the least cost diet and explicit budgeting for non-food spending. This approach is superior to the World Bank’s ‘$-a-day’ line because it is (1) clearly related to survival and well being, (2) comparable across time and space since the same nutritional requirements are used everywhere while non-food spending is tailored to climate, (3) adjusts consumption patterns to local prices, (4) presents no index number problems since solutions are always in local prices, and (5) requires only readily available information. The new approach implies much more poverty than the World Bank’s, especially in Asia. JEL codes: I12, I32, O61, O63 keywords: absolute poverty, diet problem, linear programming, World Bank poverty line Funding: This research was supported through a research allowance provided by New York University Abu Dhabi. The World Bank’s famous $-a-day poverty line began life as the finding of a scientific inquiry in the 1980s, became the Bank’s metric for measuring poverty in 1990, and reached full maturity when it was enshrined in the Millenium Development Goals as the standard for tracking poverty around the world. However, the line rests on contestable foundations that give rise to a host of theoretical and practical problems as well as leading, we argue, to underestimates of poverty in much of the developing world. While the World Bank poverty line (WBPL) was originally conceived for developing economies, it must now be applied to all countries in view of the United Nation’s new Sustainable Development Goals, which came into effect on 1 January 2016. “Goal 1.1: By 2030, eradicate extreme poverty for all people everywhere, currently measured as people living on less than $1.25 a day. ” (Atkinson 2017, p. 13). If extreme poverty is to be measured everywhere, then the WBPL must be revised since it is not valid outside of the tropics. This paper proposes a new method for defining absolute poverty that avoids the many problems of the World Bank’s line and which makes a more robust tool for measuring extreme poverty on a global basis. The statistical origins of the World Bank Poverty Line (WBPL) give rise to many of its difficulties. Ravallion, Datt, van de Walle (1991) were looking for a measure of absolute poverty. They collected poverty lines for 33 countries ranging from the very poor to the rich, converted the lines to US dollars with a PPP exchange rate and plotted the lines against per capita consumption. They noticed that the lines of the six poorest countries were clustered around $1 per day in 1985 dollars, and that became their measure of absolute poverty. The dollar value was raised to $1.08 in 1993 dollars when Chen and Ravallion (2001) updated the same data with national price indices. The empirical base of the WBPL was greatly strengthened in the new millenium when Ravallion, Chen, and Sangraulla (2009) put together a new data set of 74 national poverty lines. Once again, poverty lines increased with income, but, in this case, no such trend was apparent in the fifteen poorest countries. Ravallion, Chen, and Sangraulla concluded that these lines represented ‘absolute poverty’. Converting them to US dollars with PPP exchange rates produced the $1.25 poverty line in 2005 dollars. Most recently, the poverty lines of these 15 countries in the own currencies were raised with national price indices to 2011 values and then converted to US dollars with PPP exchange rates computed from the 2011 round of the International Comparison Program (ICP 2011) price data. The average came to US$1.88, which was rounded up to $1.90, to give the current World Bank poverty line (Ferreira et al. 2016). Similar values have been reached by other methods (Kakwani and Son 2016, Sillers 2015, Joliffe and Prydz 2016). This ‘strange alignment of the stars’ has increased the line’s credibility (Atkinson 2017, pp. 19-20). The line is only as good as these procedures, and they raise many troubling issues. First, which countries should be used to define ‘absolute poverty’? Should the reference group be updated? Deaton (2010, pp. 15-6) pointed out that India was in the original 1991 sample of poor countries but grew so much in the next fifteen years that it was not in the 2005 group of 15 poor countries. However, the Indian poverty line was very low, so excluding it in 2005 raised the average and the WBPL with it. This meant that the number of poor in India and elsewhere increased markedly despite India’s economic growth–a perverse The line as been much debated. Recent contributions include Ferreira et al. (2016), Deaton (2010), Reddy and Pogge (2010), and Ravallion (2010). Related research investigates subsistence lines (Lindgren 2015) and consumption floors (Ravallion 2016). The countries are: Malawi, Mali, Ethiopia, Sierra Leone, Niger, Uganda, Gambia, Rwanda, Guinea-Bassau, Tanzania, Tajikistan, Mozambique, Chad, Nepal, Ghana.