Economics of poverty	

Dear Susan

I’m making some attempts to draw together what I am saying about development economics.    One of the problems (for the believability of what I am saying) is that there are so many unfounded assumptions.     Another is that the magnitude of the errors is unknown.     People don’t generally want to believe that what they think is untrue.    

In relation to the World Bank’s “dollar line”  -  and therefore their “poverty” trends, basically I think I’ve won.   I checked with Shaohua Chen, co-author of the paper used as the methodology on the “poverty” indicator for the Millennium Goal, to see if they had adjusted at all for children’s needs.   They haven’t.   So it’s obviously true that, other things being equal, the World Bank has underestimated the trend in consumption poverty.   More of the poor people are now adults.    It’s obviously true that the indicator for the proportion of people in “poverty” for the Millennium Goal will not show a halving of the original level of consumption poverty.

Nor have they any information, in the vast majority of cases, on inflation rates for poor people.    So whether the Millennium Goal indicator will show a halving o consumption poverty is completely unknown.    This is a restatement of the PPP problem.    But it also applies to other studies which do not use PPP.    It applies to all economists’ studies of poverty trends.   


I’ve come up with another observation.    

The World Bank book “Globalisation, Growth and Poverty” says that 

a)	“more people are moving to cities where wages are higher” and 
b)	“the proportion of poor people has gone down by 14% in “globalising” countries”.     

But this doesn’t add up.   Even if we leave out birth and death rates, everyone knows that urban areas have higher costs of living.  That’s for two reasons:

i)	prices are higher and 
ii)	you have to spend money on more things, e.g. rent.    

Now, in a world where the proportion of all poor people in urban areas rises, you can’t use the same consumption expenditure line to measure the same amount of consumption poverty over time.    So that applies to the Millennium Goal indicator.     It also applies to the supposed statistics about “globalising” countries.   Their argument is that people moving to cities makes them richer.    Well, they aren’t necessarily richer if they have to spend more money there to achieve the same standard of living.   

But anyway we don’t know anything about the consumption levels of poor people by looking at expenditure figures, which is what (with few exceptions, economists look at).  That’s because we don’t know about inflation.  

Reddy and Pogge alerted me to an even bigger problem than they were talking about.   I had three conversations with Thomas Pogge, but he doesn’t seem to understand this.   Economists do not know the inflation rates for poor people.    The idea that “the income share of the poorest fifth shows whether the consumption share was better or worse [given zero or positive “economic growth”]”  is simply false.    There is no reason at all to think that the inflation rate for the poor is anything like the inflation rate for the whole economy.    The consumption expenditure “share” doesn’t tell us anything whatsoever about the share of consumption.    Maybe prices went up for the poor.    Maybe they went down.   No-one knows.    

The point Reddy and Pogge made is about i) international comparison and ii) comparison over time of consumption levels.   In relation to poverty trends over time, the point is really not about PPP at all, but about whether the Bank has adjusted for inflation.    No economists have adjusted for inflation, because they don’t know the inflation rate for the poor.    This is a fairly astounding claim for me to make, but it’s true.    Where were the inflation rates for the poorest fifths in “Growth is Good for the Poor”?      Nowhere.     It’s all nonsense.   


Here is what I have just sent to Alex Wilks of the Bretton Woods Project.



All the best,

Matt