What economists think about poverty calculations

Chelsea Vail | Oct 21, 2015

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Extreme poverty—defined by the United Nations as living on less than $1.25 per day—affects more than 800 million people worldwide. In 2000, the UN set the goal of reducing the extreme-poverty rate by half, a goal it met in 2010. Today, it reports that more than 1 billion people have been lifted above that benchmark since 1990.

But that invisible line is only important if it’s a meaningful barometer of welfare—and if income growth is really correlated with improving quality of life. The Initiative on Global Markets at Chicago Booth ran an Economic Experts Panel poll that addresses the practice of measuring poverty.

Do the panelists think that better health leads to economic growth, or that economic growth leads to better health? More than 40 percent say faster growth induces better health—not the other way around. Do they think the decline of people living on, say, $1 per day is a good measure of well-being among low-income populations? About 25 percent disagree.

Christopher Udry of Yale agreed that economic growth leads to better health, with a caveat: “Both directions of causality operate, but the weight of evidence is that income to health has a stronger effect.”

 

Anil Kashyap of Chicago Booth disagreed: “Seems plausible that other factors (‘institutions’) could be driving both.” 

Robert Hall of Stanford, whose comments also referred to institutional aid, was uncertain: “Thanks to products from advanced countries, poor countries have had huge improvements in longevity without much income growth.”

 

Steve Kaplan of Chicago Booth strongly agreed that it’s useful to measure the rate of people living on less than $1 per day: “The reduction in poverty worldwide so measured is a great success story over the last 35 years.”  

 

Angus Deaton of Princeton (and recipient of the 2015 Nobel Prize in economics) disagreed: “It is too incomplete, and too badly measured.” 

Oliver Hart of Harvard was uncertain, and described the kinds of things the measure doesn’t capture: “It is probably not a great measure unless it incorporates the prices of local goods. Also it misses out on non-traded goods and services.”