Good and bad news in the long war against poverty

PUBLISHED : Thursday, 28 August, 2008, 12:00am
UPDATED : Thursday, 28 August, 2008, 12:00am

First, the good news: there are far fewer poor people in Asia than we thought.

Now the bad: the number is growing rapidly.

Counting the poor is a tricky business, especially if you are trying to do it across borders. Economies are developing at different speeds, while incomes, prices and the purchasing power of different currencies all vary widely, making international comparisons difficult. As a result, the traditional definition of poverty as an income below US$1 a day is catchy but badly flawed and long out of date.

In an attempt to get a better grasp of the numbers, researchers at the Asian Development Bank have spent the last three years conducting a major study of regional poverty. Their conclusions are both surprising and worrying.

The big problem with trying to devise an international measure of poverty is that the same things cost different amounts in different countries. As a result, someone earning the equivalent of US$1 a day in Nepal may be able to scrape by fairly well, but someone with the same income in Thailand or Malaysia would be facing the bitterest hardship.

To get around this difficulty, past attempts to come up with an international standard have taken different countries' official poverty lines and made an adjustment based on the price of a typical basket of goods and services to correct for differences in purchasing power.

Applied across 16 relatively poor Asian countries, this method tells you there were 1,042 million people living in poverty in the region in 2005 (China 'declined' to participate and is not included).

The trouble with this calculation, according to ADB economists Ifzal Ali and Rana Hasan, is that the shopping basket of a typical household includes things like cars and holidays which the poor are highly unlikely to buy, so the results are misleading.

Not only do the poor buy different things to the wealthy - they do without package holidays but spend far more of their incomes on food - they typically buy in smaller quantities and may well pay different prices, for example by shopping in wet markets rather than Carrefour.

To allow for this, the ADB compiled a shopping basket of things that poor people are actually likely to consume in order to calculate poverty-specific PPP measures.

As a result, they determined that for Asia the poverty line should be drawn at US$1.35 a day (in PPP-adjusted terms) and calculated that in 2005 some 843 million people across the region fell below this level, almost 200 million fewer than originally thought.

This is encouraging. But the real value of an international standard is that it allows us to see which countries have made the most progress towards reducing poverty in recent years, and whose policies have been the most successful.

The big winner here is Vietnam, which between 1993 and 2004 cut the percentage of its population living below the poverty line from 61 per cent to just 16 per cent. The worst performer was Bangladesh, where the proportion of poor people has actually risen since the early 1990s (see the first chart below).

Clearly, high economic growth rates have played a big role in lifting many Asians out of poverty. But Dr Ali also credits Vietnam's performance to a strong focus on agricultural development, which boosted rural incomes early on in the high growth phase.

Unfortunately, however, Asia's achievements in poverty reduction are now threatened by the recent sharp increases in food prices. Working from its data sets, the ADB's economists calculate that a 10 per cent rise in food prices could plunge 85 million people across the region back into poverty (see the second chart below).

That's very bad news. In Vietnam food prices have risen by more than 100 per cent in the last two years. The poor, it seems, will be with us for a long time yet.