International Poverty: Progress and a Puzzle

Shaohua Chen and Martin Ravallion at the World Bank have prepared a \”briefing note\” with good news: global poverty rates are dropping.  They write: \”That means that 1.29 billion people in 2008 lived below $1.25 a day, as compared to 1.94 billion in 1981. 2.47 billion people in 2008 consumed less than $2 a day, as compared to 2.59 billion in 1981.\”

The idea of measuring poverty as $1.25 per day or $2 per day may shock some Americans. After all, In contrast, in the United States the poverty threshold in 2011 for a three-person family, single parent with two children, was $18,123, which works out to about $16.50 per person per day. But as the report explains: \”$1.25 is the average of the national poverty lines found in the poorest 10-20 countries.
Using this line, poverty in the world as a whole is being judged by what “poverty” mean
in the world’s poorest countries. Naturally, better off countries tend to have higher poverty lines than this frugal standard. $2 a day is the median poverty line for all developing countries.\”

The reduction in poverty rates reaches across all regions of the developing world. Not surprisingly, much of the most rapid reduction of poverty has come from China. As the figure shows, it used to be that if you included China with the rest of the developed world, it raised the overall poverty rate. But now, if you include China with the rest of the developed world, it reduces the overall poverty rate. Nonetheless, 173 million people in China remain below the $1.25 poverty line. As the World Bank describes it:

\”Looking back to the early 1980s, East Asia was the region with the highest incidence of poverty in the world, with 77% living below $1.25 a day in 1981. By 2008 this had fallen to 14%. In China alone, 662 million fewer people living in poverty by the $1.25 standard, though progress in China has been uneven over time. In 2008, 13% (173 million people) of China’s population still lived below $1.25 a day. In the developing world outside China, the $1.25 poverty rate has fallen from 41% to 25% over 1981-2008, though not enough to bring down the total number of poor, which was around 1.1 billion in both 1981 and 2008, although rising in the 1980s and ‘90s, then falling since 1999 …\”

The reduction in poverty rates is clearly good news, but the pattern of reduction in poverty rates across countries poses a puzzle that Martin Ravallion raises in \”Why Don’t We See Poverty Convergence?\” in the February 2012 issue of the American Economic Review. The article isn\’t freely available on-line, although many academics will have access through their libraries. He sets up the discussion of the puzzle this way\”

\”Two prominent stylized facts about economic development are that there is an advantage of backwardness, such that in a comparison of two otherwise similar countries the one with the lower initial mean income will tend to see the higher rate of economic growth, and that there is an advantage of growth, whereby a higher mean income tends to come with a lower incidence of absolute poverty. Past empirical support for both stylized facts has almost invariably assumed that the dynamic processes for growth and poverty reduction do not depend directly on the initial level of poverty. Under that assumption, the two stylized facts imply that we should see poverty convergence: countries starting out with a high incidence of absolute poverty should enjoy a higher subsequent growth rate in mean consumption and (hence) a higher proportionate rate of poverty reduction. That poses a puzzle. The data on poverty measures over time for 90 developing countries assembled for this article reveal little or no sign of poverty convergence.\”

Here is Ravallion\’s figure to illustrate the point. The horizontal axis has poverty rates for 90 countries, mostly from the 1980s and 1990s as data became available. The vertical axis shows the decline in poverty rates from the start of the data up to 2005. Notice that the best-fit line doesn\’t show that countries which started from higher levels of poverty have larger reductions in poverty: if anything, the relationship goes a bit the other way.

Ravallion puts it this way (citation omitted): \”The overall poverty rate of the developing world has been falling since at least 1980, but the proportionate rate of decline has been no higher in its poorest countries.\” This finding suggests that while poverty rates are diminishing over time, there is no particular reason based on past patterns to expect that the poverty rates will fall more quickly where poverty is greatest. Ravallion offers the clear implication: There do often seem to be \”advantages of backwardness,\” which relatively poorer countries can take advantage of global knowledge and market to reach a faster growth rate, but there is apparently also a drag of high poverty rates, in which the existence of a high poverty rate makes it harder for a country to reduce its poverty rate further. These factors tend to offset each other, and as a result, the poorer countries don\’t in fact reduce their poverty rates faster.

Why might the existence of high poverty rates make it harder to grow? Perhaps high poverty rates reflect the lack of a middle class, which in turn makes it harder for an economy to grow. Perhaps high poverty rates reflect a poorly-educated workforce, which means that investment in the country is unprofitable, which slows growth. Perhaps high poverty rates lead to poor health, which reduces the prospects for growth. Ravallion investigates whether factors schooling, life expectancy, and the price
of investment goods might provide a link from high initial poverty to the lack of reductions in poverty, but doesn\’t find statistical connections.  Understanding why the poorest countries have no greater success in reducing their poverty rates remains a good research topic.

The U.S. Labor Market in International Context

The Division of International Labor Comparisons at the U.S. Bureau of Labor Statistics has put out the 2011 edition of its chartbook, Charting International Labor Comparisons. There are sections with comparisons on GDP, manufacturing, and consumer prices. Here, I\’ll stick to a few charts of comparisons on labor force participation levels, employment rates, and unemployment rates that caught my eye.

In terms of employment growth, the light blue lines show job growth from 2000 to 2007. The dark blue lines show job growth–positive or negative–from 2007 to 2009. BLS writes: \”Between 2007 and 2009, the sharpest declines in employment were in Estonia and Spain, followed by Ireland and the United States.\” Notice that over the 2007 to 2009 period, many countries have had job growth that was positive, or only very slightly negative.

Here are three measures of unemployment, as explained by BLS. \”UR 1 is the most restrictive rate of labor
underutilization and consists only of the subset of the unemployed who were unemployed for at least 1 year. UR 3 is the official unemployment rate and the most widely recognized. The broadest rate, UR 6, includes
the unemployed, the marginally attached, and persons who are employed but who worked fewer hours than they would like (i.e., the time-related underemployed).\” Spain clearly has the most grievous unemployment problem. But while the U.S. economy is OK on it\’s long-term unemployment rate–at least as of the 2009 date for this data–it\’s official unemployment rate and its broader rate of labor market underutilization are among the worst of the rest.

In terms of labor force participation rates for men and women. BLS writes: \”The highest participation rates for men were in large emerging economies: Brazil, India, Mexico and China. China also had the highest participation rate for women and, thus, a relatively low gender gap.\” The U.S. shows up here are roughly comparable to a number of other high-income countries.

In labor force participation rate by age, the U.S. doesn\’t look especially good in the prime-age 25-54 age group, but performs relatively well in younger and older age groups. As BLS points out: In Argentina and the
Philippines, more than one-third of persons ages 65 and older were still in the labor force. In contrast, many European countries had rates below 5 percent for this age group. Participation rates among youth varied most across countries. The Netherlands and Australia had the highest participation rates (above 70 percent) while
Hungary, the Republic of Korea, and Greece had the lowest rates (under 30 percent).\”

When it comes to labor force participation as a share of the working age population, BLS writes: \”Italy was the only country with less than half of its working-age population engaged in the labor force.\” Given the financial difficulties in Greece, it\’s interesting to see its very low rate of labor force participation among working age adults.