Sunday, November 01, 2009

New Study Shows Significant Drop in World Poverty

Some really interesting results from a new NBER working paper "Parametric Estimations of the World Distribution of Income," by Maxim Pinkovskiy and Xavier Sala-i-Martin (Columbia University):

Abstract: We use a parametric method to estimate the income distribution for 191 countries between 1970 and 2006. We estimate the World Distribution of Income and estimate poverty rates, poverty counts and various measures of income inequality and welfare. Using the official $1/day line, we estimate that world poverty rates have fallen by 80% from 0.268 in 1970 to 0.054 in 2006 (see chart above). The corresponding total number of poor has fallen from 403 million in 1970 to 152 million in 2006. Our estimates of the global poverty count in 2006 are much smaller than found by other researchers. We also find similar reductions in poverty if we use other poverty lines. We find that various measures of global inequality have declined substantially and measures of global welfare increased by somewhere between 128% and 145%. We analyze poverty in various regions.

MP: The bottom chart above shows poverty rates for the five regions analyzed in the paper, with some pretty amazing results for East Asia (includes mainland China, Taiwan and S. Korea), which in 1960 had the highest regional poverty rate in the world by far, at 58.8%, compared to 39.9% for Africa, 11.6% for Latin America, 8.4% for MENA (Middle East, N. Africa) and South Asia (20.1%). In the 36-year period between 1970 and 2006, the poverty rate in East Asia fell to only 1.7% by 2006, which was below any of the other four regions: Africa (31.8%), Latin America (3.1%), MENA (5.2%) and South Asia (2.6%).

Both graphs are based on a poverty measure of $1/day, but the authors obtain similar results using four other measures of poverty from $2 to $10 per day, both for the overall reduction in world poverty (top graph) and the regional differences (bottom graph).

Bottom Line: Assuming these estimates are accurate, the 80% reduction in poverty between 1970 and 2006 has to be the greatest reduction in world poverty in such a short time span in the history of the world, and the 97% reduction in East Asia has to be the most significant improvement in regional standard of living in history as well. The authors don't explore the reasons for the record reduction in world poverty, but some likely candidates might be: globalization, market-based reforms, liberalization, Information Age technology, productivity gains in agriculture, the collapse of central planning in China and India, etc.

Update: The middle graph now shows the world poverty rate adjusted for inflation, using the authors' "One 2006 Dollar Per Day" data. The inflation-adjusted data also shows a 79.5% reduction, from 11.2% in 1970 to 2.3% in 2006.


At 11/01/2009 12:02 PM, Anonymous Anonymous said...

I didn't see anything in there about correcting for inflation. In 1970 gold was at $35. The present day dollar has a little over 3% of it's 1970 value.

At 11/01/2009 1:20 PM, Blogger PeakTrader said...

Michael, if real GDP has been overstated and inflation has been understated, why are living standards higher now than in 1970?

Maybe, more people have money to buy gold, driving up the price, because they're wealthier.

At 11/01/2009 1:39 PM, Anonymous Anonymous said...

For Asia and to some extent for other areas its really the demise of subsistence farming and moving to the cities that did the trick. This is the same thing that occurred in the developed world about 75-100 years earlier. The increase in ag productivity forced people off the land, to cities where they could be more productive. The other causes are secondary, its moving people into the money economy from the subsistence economy that makes the difference

At 11/01/2009 2:03 PM, Blogger PeakTrader said...

Some believe inflation has been higher (e.g. over 7%) than nominal GDP growth (e.g. 6%).

At 11/01/2009 2:20 PM, Anonymous Anonymous said...

I was being silly. I'm sure the report corrected for inflation, but just imagine how much more the world wide wealth would be if the dollar was still valued at $35/oz.

At 11/01/2009 2:23 PM, Blogger Mark J. Perry said...

Michael: Post has been updated to include a graph of the authors' data for $1 per day in constant 2006 dollars. The reduction in the world poverty rat in percentage terms is still about 80%.

At 11/01/2009 2:52 PM, Blogger PeakTrader said...

Michael, it's uncertain if zero inflation would create more wealth. A little inflation may promote growth (e.g. 3% real growth and 3% inflation, or 6% nominal growth). There are many factors that facilitate growth.

At 11/01/2009 3:44 PM, Blogger PeakTrader said...

Those who believe inflation is understated imply the money market and bond market are wrong about their rates, unless real GDP is overstated. However, if real GDP is too low, that's normally disinflationary. There are other factors that don't add up to a higher inflation rate. So, anyone who believes inflation is really much higher isn't supported by reality.

At 11/01/2009 3:59 PM, Anonymous Benny "Tell It LIke It Is Man" Cole said...

I would love the credit free markets for the radical decrease in poverty in China except that they absolutely do not practice either concept--free trade or free enterprise.
It is a mercantile trading nation, and the domestic economic heavily controlled by the national, or regional governments. Cronyism runs rampant.

I suggest that a strong work ethic, strong culture and an business-oriented government (very little militarism) trumped everything else. They might have done better with a democratic-free enterprise system (that I prefer), but who can say?

While we in the USA are subsidizing rural economies and funding a parasitic military, China is building up its urban-industrial base. Guess who will prevail?

The USA will not be able to compete commercially with China, free as they are from a parasitic rural interest groups and oversized military.

The next century is China's, and that reality becomes more obvious everyday. We just spent $1 trillion in Iraqistan--they spend trillions on new factories and urban infrastructure.

Unless we focus on revitalizing our industries and urban areas, we are destined to becoming a backwater state, along with Europe.

Most likely, the best coastal land in the USA will be owned by Chinese in 100 years. They own Vancouver already. They will control the bulk on the globe's commerce. Americans will live in cruddy suburbs outside Phoenix. Detroit is the new urban model for the USA, unless we change our ways.

We will have the best aircraft carriers--although aircraft carriers are not configured to carry freight, so I guess we will have the best scrap metal money can buy. Every time you look at an aircraft carrier, think, "There goes a $4 billion piece of scrap metal."

It is hard to make money with an aircraft carrier.

At 11/01/2009 4:57 PM, Anonymous Anonymous said...

I don't doubt Mark's or PeakTrader's information.

I wonder what was going on between 1970 and 1985 that brought the rate down from 11.2% to 3%

The only thing that comes to mind is that major conflicts were ending in Asia that allowed their economies to grow. Particularly the Nixon-China deals.

I'm temped to have the graphs printed of business cards to hand out to leftist.

At 11/01/2009 5:06 PM, Blogger juandos said...

benny the pseudo economist strikes again!

That was hilarious! Thanks man!

It seems that professor Mark's posting has turned out to be quite popular...

Googling 'drop in world poverty' produced rather an amazing amount of hits referencing Professor Mark's posting...

At 11/01/2009 5:53 PM, Anonymous Benny "Tell It LIke It Is Man" Cole said...

If you find my postings funny, I guess we can assume you are mainland Chinese. They are laughing too...all the way to the bank.

At 11/01/2009 6:51 PM, Blogger juandos said...

"I guess we can assume you are mainland Chinese"...


You got a mouse in your pocket?

At 11/01/2009 8:59 PM, Blogger PeakTrader said...

Unlike the U.S. Industrial Revolution, from 1871-1914, China gives away its output to foreign consumers almost for free. It's the world's low cost producer, because it pays slave wages and doesn't take social costs into account. Basically, China is in industries with declining prices, unlike the U.S., which has market power. So, China has to make up in volume what it loses in value. The government or communist elites benefit at the expense of the masses. They have a strong work ethic, in part, because their "safety net" is a grave. It's likely India will surpass China's economy in the 21st century, because of barriers to growth. China cannot fight cheap wars for cheap oil. If China's elite wants to buy U.S. assets, that benefits the U.S. The U.S. has been a "Black Hole" attracting foreign goods and capital. Now it's attracting the owners of that capital themselves.

Related article:

U.S. has plundered world wealth with dollar: China paper
Fri Oct 24, 2008 6:14am EDT

Plunder: to rob of goods or valuables by open force, as in war; despoil, or fleece; to take wrongfully, as by pillage, robbery, or fraud; loot.

BEIJING (Reuters) - The United States has plundered global wealth by exploiting the dollar's dominance, and the world urgently needs other currencies to take its place, a leading Chinese state newspaper said.

"The grim reality has led people, amidst the panic, to realize that the United States has used the U.S. dollar's hegemony to plunder the world's wealth," said the commentator, Shi Jianxun, a professor at Shanghai's Tongji University.

Shi, who has before been strident in his criticism of the U.S., said other countries had lost vast amounts of wealth because of the financial crisis, while Washington's sole concern had been protecting its own interests.

Shi suggested that all trade between Europe and Asia should be settled in euros, pounds, yen and yuan, though he did not explain how the Chinese currency could play such a role since it is not convertible on the capital account.

At 11/02/2009 3:02 AM, Blogger PeakTrader said...

Why China's Wu-Mart is popular and Wal-Mart is a luxury store. Article:

"Mattel, foreign distributers, shippers, advertisers, etc. received $9.65 for each Barbie Doll produced in China, while China received $0.35 for labor, plant & equipment, and electricity."

"Can you live on the 25-cent-an-hour wages U.S. companies and their factory contractors pay in China, which come to about $65 a month? Not even close: It costs $12.05 a month in China just to provide milk for one six-month old infant. So this expense alone would consume 19 percent of your total wage. How could a factory worker afford a new 15 by 17-inch color TV that costs $343.37, which is nearly half a year’s wages. Just the tax on purchasing a new car is $1,205."


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