I don’t agree that the threshold is not completely arbitrary. I agree that it is set by the World Bank, but I don’t agree that means it is not arbitrary. If everyone in the world lived on $2.16 per day, I don’t think we would have reduced what you call “unacceptable deprivation” to zero, I think the world would be in dire straits.
Pretty much all measures of wellbeing, subjective and objective, increase at exactlythesameratethroughout the whole of the income distribution. Drawing an extremely low line and defining everything below that line as the problem is therefore a mistake. I agree that the symptoms of poverty decrease when people are less monetarily poor, but I don’t think that counts in favour of using life below $2.15 per day as the measure of poverty.
It is not plausible that cash transfers are the top 100 (or 1,000) ways to reduce extreme poverty in poor countries. One piece of evidence for this is historical: for all countries that have ever eliminated extreme poverty, the things that caused that were never cash transfers. Rather, they were usually caused by changes in economic policy.
On the example of Rwanda. GDP per capita in Rwanda is around $960 per person, or around $2.60 per day. You say that “Despite these commendable strides, over half of Rwandans still live in extreme poverty.” Since the average income is $2.60 per day, it is not surprising that more than half of the population lives on less than $2.15 per day. This is an argument for the necessity of economic growth, not an argument for cash transfers.
Taking your example of China. The thing that caused China to massively reduce extreme poverty was economic liberalisation under Deng, e.g. agricultural liberalisation, international trade etc. Even if they are now, as a middle income country, using cash transfers to reduce extreme poverty, that is not an argument for the claim that in poor countries cash transfers will be more effective than changes in economic policy in reducing extreme poverty, on the current margin. China is the most striking counterexample to that claim in history.
“Many countries use cash transfers to eliminate extreme poverty, which economic growth alone will not solve.” “we should not expect extreme poverty to “solve itself” overtime through economic growth”
Empirically, this is not correct. The median income in a country ~completely explains levels of extreme poverty in that country. Increasing median income is empirically necessary and sufficient for the elimination of extreme poverty. Very nearly all of the observed variation in extreme poverty rates, on any poverty line, is explained by median income—the R^2 is above 0.98 (Pritchett 2019)
Thanks John for this insightful set of comments I have enjoyed them immensely.
The $2.15 per day threshold is arbitrary yes, and it also makes me angry sometimes. The idea that for $2.15 in Uganda, you can feed and clothe your family, send your kids to school, pay school fees, pay for healthcare and buy the technology and transport needed to do OK in the world for only $2.15 a day is borderline absurd. I’m thinking of writing a post about this threshold actually as I think it misleads a lot of people. Yes life is cheaper here, but nowhere near that much cheaper.
I might push back a bit on your comment “For all countries that have ever eliminated extreme poverty, the things that caused that were never cash transfers. Rather, they were usually caused by changes in economic policy. I think this is an oversimplification. Many African countries have had very liberal economic policy for the last 20-40 years and they haven’t seen the kind of growth China and Southeast Asia have seen. I’m not saying economic policy isn’t important, but listing it as “the cause” of the development boom in China and many other countries seems oversimplified.
”The thing that caused China to massively reduce extreme poverty was economic liberalisation under Deng, e.g. agricultural liberalisation, international trade etc. “For sure the liberalisation allowed the development to happen—it couldn’t have happened without the policy changes, but many other factors were needed as well. I’m far from an expert but some of these might include a high quality education system, fortunate timing in becoming the industrial powerhouse of the world, massive investment into local infrastructure and the one child policy.
I would be interested as a side note though to hear your thoughts on why liberalising African economies seems to have achieved so little in many cases.
I agree with your first comment. The idea that living on >$2.15 is in any sense an acceptable standard of living is clearly incorrect. A world in which everyone lives on $2.16 per day might be a decent enough outcome after a nuclear winter, but it definitely should not be a core global development goal.
I agree on your second comment.
I agree on the third comment, but not on some of the specifics. In any case, the changes were driven by national level systemic policy changes, not by direct targeted aid.
I’m not best placed to speculate on the last question.
Ranil Dissanayake actually just published an article in Asterisk about the history of the poverty line concept. The dollar-a-day (now $1.25 a day or something) line was kind of arbitrary and kind of not:
rather than make their own judgment on what constituted sufficient living, they could instead rely on the judgment of poor countries themselves. They would simply take an average of the poorest countries in the world and declare this to be the global minimum of human sufficiency
noting further in a footnote that
Of course, things are never quite so pure: The bank was closely involved in the development of national poverty lines around the world, so there was some element of circularity to the development of the global line.
The whole article is very interesting, worth a read for people in this space.
Hello, thanks for the response.
I don’t agree that the threshold is not completely arbitrary. I agree that it is set by the World Bank, but I don’t agree that means it is not arbitrary. If everyone in the world lived on $2.16 per day, I don’t think we would have reduced what you call “unacceptable deprivation” to zero, I think the world would be in dire straits.
Pretty much all measures of wellbeing, subjective and objective, increase at exactly the same rate throughout the whole of the income distribution. Drawing an extremely low line and defining everything below that line as the problem is therefore a mistake. I agree that the symptoms of poverty decrease when people are less monetarily poor, but I don’t think that counts in favour of using life below $2.15 per day as the measure of poverty.
It is not plausible that cash transfers are the top 100 (or 1,000) ways to reduce extreme poverty in poor countries. One piece of evidence for this is historical: for all countries that have ever eliminated extreme poverty, the things that caused that were never cash transfers. Rather, they were usually caused by changes in economic policy.
On the example of Rwanda. GDP per capita in Rwanda is around $960 per person, or around $2.60 per day. You say that “Despite these commendable strides, over half of Rwandans still live in extreme poverty.” Since the average income is $2.60 per day, it is not surprising that more than half of the population lives on less than $2.15 per day. This is an argument for the necessity of economic growth, not an argument for cash transfers.
Taking your example of China. The thing that caused China to massively reduce extreme poverty was economic liberalisation under Deng, e.g. agricultural liberalisation, international trade etc. Even if they are now, as a middle income country, using cash transfers to reduce extreme poverty, that is not an argument for the claim that in poor countries cash transfers will be more effective than changes in economic policy in reducing extreme poverty, on the current margin. China is the most striking counterexample to that claim in history.
“Many countries use cash transfers to eliminate extreme poverty, which economic growth alone will not solve.” “we should not expect extreme poverty to “solve itself” overtime through economic growth”
Empirically, this is not correct. The median income in a country ~completely explains levels of extreme poverty in that country. Increasing median income is empirically necessary and sufficient for the elimination of extreme poverty. Very nearly all of the observed variation in extreme poverty rates, on any poverty line, is explained by median income—the R^2 is above 0.98 (Pritchett 2019)
Thanks John for this insightful set of comments I have enjoyed them immensely.
The $2.15 per day threshold is arbitrary yes, and it also makes me angry sometimes. The idea that for $2.15 in Uganda, you can feed and clothe your family, send your kids to school, pay school fees, pay for healthcare and buy the technology and transport needed to do OK in the world for only $2.15 a day is borderline absurd. I’m thinking of writing a post about this threshold actually as I think it misleads a lot of people. Yes life is cheaper here, but nowhere near that much cheaper.
I might push back a bit on your comment “For all countries that have ever eliminated extreme poverty, the things that caused that were never cash transfers. Rather, they were usually caused by changes in economic policy. I think this is an oversimplification. Many African countries have had very liberal economic policy for the last 20-40 years and they haven’t seen the kind of growth China and Southeast Asia have seen. I’m not saying economic policy isn’t important, but listing it as “the cause” of the development boom in China and many other countries seems oversimplified.
”The thing that caused China to massively reduce extreme poverty was economic liberalisation under Deng, e.g. agricultural liberalisation, international trade etc. “For sure the liberalisation allowed the development to happen—it couldn’t have happened without the policy changes, but many other factors were needed as well. I’m far from an expert but some of these might include a high quality education system, fortunate timing in becoming the industrial powerhouse of the world, massive investment into local infrastructure and the one child policy.
I would be interested as a side note though to hear your thoughts on why liberalising African economies seems to have achieved so little in many cases.
Hi Nick,
I agree with your first comment. The idea that living on >$2.15 is in any sense an acceptable standard of living is clearly incorrect. A world in which everyone lives on $2.16 per day might be a decent enough outcome after a nuclear winter, but it definitely should not be a core global development goal.
I agree on your second comment.
I agree on the third comment, but not on some of the specifics. In any case, the changes were driven by national level systemic policy changes, not by direct targeted aid.
I’m not best placed to speculate on the last question.
Ranil Dissanayake actually just published an article in Asterisk about the history of the poverty line concept. The dollar-a-day (now $1.25 a day or something) line was kind of arbitrary and kind of not:
noting further in a footnote that
The whole article is very interesting, worth a read for people in this space.