Poverty in Nepal and South Asia based on $1.90 a day poverty line

The World Bank recently updated its global poverty line, which is now re-estimated at $1.90 a day, up from $1.25 a day earlier. Accordingly, poverty estimates for all countries have been revised, mostly downward.

Nepal’s absolute poverty at $1.90 a day stood at 14.9% in 2010, a sharp decrease from 47.1% in 2003 and 61.7% in 1995. Compare this with the estimate based on $1.25 a day (2005 PPP): in 2010 absolute poverty stood at 23.7%, also sharply down from 53.1% in 2003 and 68.0% in 1995. The new poverty benchmark shows a marginal acceleration in absolute poverty reduction, but overall not much difference in rate of decrease over the last two decades.

The estimates based on national poverty line, which is fixed at NRs 19,261 (NRs 11,929 for food items and NRs 7,332 for non-food items in 2011 prices) are the same. The estimates based on NLSS III data show that about 25.2% of the people lived below the national poverty line in 2010/11. Consumption basket was changed in this round of estimate, so it cannot be strictly compared to the previous estimates. See this for more and this for poverty by district. The major contributing factors for poverty reduction are remittance income (see here and here), higher agricultural wages, urbanization (mostly propelled by rural-urban migration) and investment in public services (education and healthcare, financed mostly by donors) (see here). It has hardly anything to do with economic growth.

Poverty in South Asia

Now, lets look at how the other South Asian economies fare with the re-estimated global poverty estimate. India has the highest poverty rate (21.3%) in South Asia, followed by Nepal and Pakistan. Overall, all countries have managed to lower poverty save the Maldives.

Inequality in South Asia

Nepal lowered inequality (as measured by Gini index based on consumption) from 43.3 in 2003 to 32.8 in 2010. Similarly, Bangladesh, the Maldives and Pakistan have marginally also lowered inequality. The most progress is achieved by Nepal. Inequality seems to have increased in Bhutan, India and Sri Lanka.

Consumption share

The share in consumption of the lowest 40% of the population stood at 20.5% and the highest 40%’s share was 63.3% in Nepal in 2010. The share of consumption attributed to the lowest 40% has increased and the share of the highest 40% decreased during the last two living standard survey periods. India and Sri Lanka saw a marginal decline in the consumption share of the lowest 40% population.

Briefly about the re-estimated international poverty line

While the new poverty line is based on 2011 purchasing-power-parity (PPP), the earlier poverty line was based on 2005 PPP prices. The other methods of computing the poverty line remains the same (basically, the earlier global extreme poverty line was expressed in 2011 PPP values computed under the International Comparison Program in 2014).

The new global poverty line is computed by taking the average of national poverty lines of the 15 poorest countries (Chad, Ethiopia, The Gambia, Ghana, Guinea-Bissau, Malawi, Mali, Mozambique, Nepal, Niger, Rwanda, Sierra Leone, Tajikistan, Tanzania and Uganda) in 2011 and then converted into US dollars using 2011 PPP. So, starting October 2015 the new global extreme poverty line is $1.90 a day. About 987 million people globally (14.2% of global population) lived under this line in 2012 and it is projected to drop to around 700 million in 2015. More here and here.

A bit of timeline of the global poverty estimates:

• $1 a day created in 1991 used 1985 PPP
• Re-estimated to $1.08 a day using 1993 PPP
• Re-estimated to $1.25 a day using 2005 PPP
• Re-estimated to $1.90 a day (precisely $1.88 a day) using 2011 PPP

Impact of inequality or equality on growth…it depends

Dani Rodrik on inequality: there is no universal evidence that inequality jeopardizes growth (alternatively, equality supports growth). It all depends on other supporting factors (the root causes may not be known or cannot be factored in econometric analysis), and there is no iron law.

Excerpts from the article:

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The belief that boosting equality requires sacrificing economic efficiency is grounded in one of the most cherished ideas in economics: incentives. Firms and individuals need the prospect of higher incomes to save, invest, work hard, and innovate. If taxation of profitable firms and rich households blunts those prospects, the result is reduced effort and lower economic growth. Communist countries, where egalitarian experiments led to economic disaster, long served as “Exhibit A” in the case against redistributive policies.

In recent years, however, neither economic theory nor empirical evidence has been kind to the presumed tradeoff. Economists have produced new arguments showing why good economic performance is not only compatible with distributive fairness, but may even demand it.

For example, in high-inequality societies, where poor households are deprived of economic and educational opportunities, economic growth is depressed. Then there are the Scandinavian countries, where egalitarian policies evidently have not stood in the way of economic prosperity.

[…]Economics is a science that can claim to have uncovered few, if any, universal truths. Like almost everything else in social life, the relationship between equality and economic performance is likely to be contingent rather than fixed, depending on the deeper causes of inequality and many mediating factors. So the emerging new consensus on the harmful effects of inequality is as likely to mislead as the old one was.

Consider, for example, the relationship between industrialization and inequality. In a poor country where the bulk of the workforce is employed in traditional agriculture, the rise of urban industrial opportunities is likely to produce inequality, at least during the early stages of industrialization. As farmers move to cities and earn higher pay, income gaps open up. And yet this is the same process that produces economic growth; all successful developing countries have gone through it.

In China, for example, rapid economic growth after the late 1970s was associated with a significant rise in inequality. Roughly half of the increase was the result of urban-rural earnings gaps, which also acted as the engine of growth.

Or consider transfer policies that tax the rich and the middle classes in order to increase the income of poor households. Many countries in Latin America, such as Mexico and Bolivia, undertook such policies in a fiscally prudent manner, ensuring that government deficits would not lead to high debt and macroeconomic instability.

[…]It is good that economists no longer regard the equality-efficiency tradeoff as an iron law. We should not invert the error and conclude that greater equality and better economic performance always go together. After all, there really is only one universal truth in economics: It depends.

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An interesting theory on inequality: Wealth gap (including inherited) will be the main issue in the long run

An interesting review of Thomas Piketty's Capital in the 21st Century by Matt Yglesias at Vox.

The main point is that: Wealth to income ratio & rate of return on capital to GDP growth ratio are increasing = Top very few already wealthy are getting wealthier and wealthier = Widening inequality. 

Matt summarizes:

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[1] The ratio of wealth to income is rising in all developed countries.

[2] Absent extraordinary interventions, we should expect that trend to continue.

[3] If it continues, the future will look like the 19th century, where economic elites have predominantly inherited their wealth rather than working for it.

[4] The best solution would be a globally coordinated effort to tax wealth.

Highly concentrated income was in the hands not just of the top 10 or 20 percent of households but the top 1, 0.1, or even 0.01 percent. [...]The dynamic towards wealth inequality is built into capitalism rather than any one country's economic policies. [...]In the long run the economic inequality that matters won't be the gap between people who earn high salaries and those who earn low ones, it will be the gap between people who inherit large sums of money and those who don't. [...]Piketty says we are headed for a world of patrimonial capitalism where the Forbes 400 list will be dominated not by the founders of new companies but by the grandchildren of today's super-elite.

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Basically, inherited wealth + higher retention of income from the use of factors of production make wealthy folks even wealthier. Looks like an accumulative process that kick-starts entrepreneurship up to a certain threshold but then widens income inequality after that threshold is breached. Finding a fine balance/non-static equilibrium may be the trick now (= at least some form of progressive redistribution without stymieing entrepreneurship). Piketty advocates a global wealth tax.

Progress in reducing gender inequality

Nepal has made consistent progress in reducing gender inequality, according to Global Gender Gap Report 2013. However, much more needs to be done in moving up the ranking. This necessitates further improvements in economic participation, education attainment, health and survival and political empowerment.

Below is a chart that shows the rank and score of Nepal in global gender gap index, which provides insights into access to resources and opportunities (note that it does not give insights into the actual levels of the available resources and opportunities).

The index is aggregated based on scores in the following four indicators:

• Economic participation and opportunity – salaries, participation and highly skilled employment
• Educational attainment – access to basic and higher levels of education
• Political empowerment – representation in decision-making structures
• Health and survival – life expectancy and sex ratio

Overall, Nepal ranks 12th in labor force participation; 1st in sex ratio at birth (female/male); 22nd in women in parliament; 115th in estimated earned income (PPP US$); 125th in literacy rate; 126th in enrollment in primary education; and 110 in professional and technical workers.

Links of Interest (2013-04-05)

Links of interest series is back again. Below are links (and excerpts) to some of the interesting papers and articles.

Does gender inequality hinder development and economic growth?

[The evidence is not conclusive, i.e. a definitive causal link between inequality and growth is not established yet. But, this doesn’t mean “imply that inequality-reducing policies are ineffective.”]

Economics versus Politics: Pitfalls of Policy Advice

[Acemoglu and Robinson argue that “sound economic policy should be based on a careful analysis of political economy and should factor in its influence on future political equilibria.”]

Cash transfers and child schooling : evidence from a randomized evaluation of the role of conditionality

[Akresh, de Walque and Kazianga: “The results indicate that unconditional and conditional cash transfer programs have a similar impact increasing the enrollment of children who are traditionally favored by parents for school participation, including boys, older children, and higher ability children. However, the conditional transfers are significantly more effective than the unconditional transfers in improving the enrollment of "marginal children" who are initially less likely to go to school, such as girls, younger children, and lower ability children. Thus, conditionality plays a critical role in benefiting children who are less likely to receive investments from their parents.”]

Trends in developing country trade 1980-2010

[Michalopoulos and Ng: “This paper reviews trends and patterns in developing countries' trade from 1980 to 2010. During the 30-year span, world trade expanded rapidly, especially in developing countries in the last decade. A similar picture emerges in trade in services. These overall trends, however, mask different trade patterns during some of the time periods and among different developing countries and groups. For example, except for Asia, the 1980s were pretty much a "lost" decade for many developing countries and groups. But that changed in the 1990s and 2000s, with trade by all major developing countries growing faster than developed countries. From 1980 to 2000, trade by Least Developed Countries grew much more slowly than that of developing countries as a whole. But those countries saw the fastest growth in trade in the following decade. This strong overall trade performance -- with some exceptions (for example Sub-Sahara Africa in the manufacturing trade) -- raises questions about sustainability, trade policy and the architecture of the trading system.”]

Does access to finance matter in microenterprise growth ? evidence from Bangladesh

[Khandker, Samad and Ali: “The findings suggest that households engaged in microenterprise activities, in addition to farm and other nonfarm activities, are much better off (in terms of income, expenditure and poverty) than those not engaged in such activities. Fewer than 10 percent of the enterprises have access to institutional finance (formal banks or microcredit), although the rate of return on microenterprise investments is more than sufficient (36 percent per year) to repay institutional loans. The research suggests that credit constraints may reduce the enterprises' profit margin by as much as 13.6 percent per year. As the returns to microenterprise investment are found to be high, microfinance institutions can play a larger role in supporting microenterprise growth in Bangladesh.”]

A brighter future for renewable energy with private sector involvement in Nepal

[ Friis Bach and Pokharel write: “The National Rural and Renewable Energy is innovative as it seeks to realize the great scope of credit financing of renewable energy. The private sector and public-private partnerships are keys to the success of the program. The public sources and development assistance is simply not enough, if we want to ensure universal access to sustainable energy. At the same time, there should be a sound profit to earn for private sector, if they engage in new models for financing investments in renewable energy. The Government of Nepal and development partners have therefore agreed to establish a new Central Renewable Energy Fund (CREF) mechanism–the CREF to be handled by a bank–with an estimated budget of US $ 115 million for the next five years. We are not creating a new institution, but buying into existing commercial and development banks, which is more efficient and sustainable. Through subsidies and credits, the CREF will facilitate bankable renewable energy solutions to rural Nepal on an even larger scale. Once established and proven as an effective financing mechanism for the sector, it is expected that further funds will be committed to CREF, from public, development and private sources.”]

Understanding inclusive growth: Access to economic and development opportunities

Inclusive growth is one of the most talked about issues in developing countries, especially those in transition, these days. It has been pretty much widely accepted that growth alone is not sufficient; it has to be followed by wider access to economic opportunities and provision of social protection for those left out of the growth process.

ADB has come up with a framework for inclusive growth, which has three main components:  (i) High and sustainable growth; (ii) Access to economic and social development opportunities; and (iii) Stronger social protection. 

It also has a list of 35 indicators to quantify (either directly or via proxies) inclusive growth. This follow up to an earlier blog post sheds some light on the second pillar of inclusive growth, i.e. access to economic and social development opportunities.

The second pillar emphasizes broader access to economic and social development opportunities, especially for the poor and disadvantaged. Its components include improvements in:

• Basic services including health, education, water and sanitation, and electricity
• Urban development for the poor
• Rural development
• Inclusionary reforms
• Public sector management

The table below shows the quantifiable indicators for the second pillar of inclusive growth. The information and data in this blog come from ADB’s FIGI 2012 and the related dataset (Nepal only; for other countries, see this one).

Social Inclusion to Ensure Equal Access to Economic Opportunity	1990 or Nearest Year		2010 or Latest Year
Access and Inputs to Education and Health
School life expectancy (primary to tertiary) years	8.8	(2000)	8.9	(2002)
by Sex
Male	10.0	(2000)	9.9	(2002)
Female	7.5	(2000)	7.9	(2002)
Pupil-teacher ratio (primary)	39		30	(2011)
Diphtheria, tetanus toxoid, and pertussis (DTP3) immunization coverage among 1-year-olds  percent	43		82
by Residence
Urban	...		93	(2006)
Rural	...		88	(2006)
Urban-to-rural ratio	...		1.1	(2006)
by Wealth Quintile
Lowest	...		75	(2006)
Highest	...		96	(2006)
Highest-to-lowest ratio	...		1.3	(2006)
Physicians, nurses, and midwives per 10,000 population	...		6.7	(2004)
Physicians	...		2.1	(2004)
Nurses and Midwives	...		4.6	(2004)
Government expenditure on education as a percentage of total government expenditure	14.0	(1995)	17.9	(2011)
Government expenditure on health as a percentage of total government expenditure	4.1	(1995)	7.2	(2011)
Access to Basic Infrastructure Utilities and Services
Population with access to electricity percent	15.4	(2000)	43.6	(2009)
by Residence
Urban	...		89.7	(2008)
Rural	...		34.0	(2008)
Urban-to-rural ratio	...		2.6	(2008)
Share of population using solid fuels for cooking  percent	88.3	(2001)	83.3	(2006)
by Residence
Urban	39.1	(2001)	39.1	(2006)
Rural	94.1	(2001)	92.3	(2006)
by Wealth Quintile
Lowest	...		100.0	(2006)
Highest	...		31.3	(2006)
Population using improved drinking water sources  percent	76		89
by Residence
Urban	96		93
Rural	74		88
Population using improved sanitation facilities  percent	10		31
by Residence
Urban	37		48
Rural	7		27
Gender Equality and Opportunity
Gender parity in education
Primary	0.63	(1991)	0.86	(2002)
Secondary	0.46	(1991)	0.89	(2006)
Tertiary	0.33	(1991)	0.40	(2004)
Antenatal care coverage of at least one visit  percent of live births	15.4	(1991)	58.3	(2011)
by Residence
Urban	...		84.6	(2006)
Rural	...		37.5	(2006)
Urban-to-rural ratio	...		2.3	(2006)
by Wealth Quintile
Lowest	...		17.7	(2006)
Highest	...		84.1	(2006)
Highest-to-lowest ratio	...		4.8	(2006)
Antenatal care coverage of at least four visits  percent of live births	8.8	(1996)	29.4	(2006)
by Residence
Urban	...		51.9	(2006)
Rural	...		26.0	(2006)
Urban-to-rural ratio	...		2.0	(2006)
by Wealth Quintile
Lowest	...		11.0	(2006)
Highest	...		60.0	(2006)
Highest-to-lowest ratio	...		5.5	(2006)
Gender parity in labor force participation (Aged 15 and over)	0.88		0.92	(2011)
Percentage of seats held by women in national parliament	6.1		33.2	(2012)

In the next blog post, I will share information about the third pillar of inclusive growth (stronger social protection).