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The measure of poverty

30 June 2014
by Brian Keeley

We’ve both got a dozen loaves. On average of course.

The economic crisis recedes in the rear-view mirror, but its impact on people’s lives remains visible. Two groups show particular signs of lingering economic hurt – the poor and the young. According to the OECD, poverty rose by 2 percentage points in rich countries between 2007 and 2011, and by rather more in countries like Spain and Greece.

Now, if you’re a regular reader, you may be asking yourself, what sort of poverty? The answer is a little complicated, but it helps to illustrate an important idea: Standard measures of poverty don’t always tell us what’s really happening in people’s lives. That can be especially true during a recession in developed countries and, as we’ll see later, for people living in – or on the edge of – poverty in developing countries.

For OECD countries, the most widely used poverty measure is “relative poverty,” or the proportion of people earning less than half their country’s median income. (Median income is the point that separates the top half of earners from the bottom half.)

But there’s a problem with “relative poverty”– it’s … eh, relative. It tells you only how a person or a group is faring compared to the general population. That can become an issue during a recession, when there may be a general decline in people’s income (and, thus, in median income). As a result, even if poorer people are suddenly earning a lot less, they may not be very much worse off in relative terms.

And that’s pretty much what happened in the wake of the financial crisis. Poverty certainly deepened between 2007 and 2011 in OECD countries, but relative poverty didn’t change all that much.

This explains why OECD inequality data also looks at what’s called “anchored poverty”. In effect, instead of looking at how low earners are doing compared with the current median income it looks at how they’re doing now compared to sunnier economic times, in this case 2005.

This anchored measure reveals sharp rises in poverty in a number of OECD countries between 2007 and 2011. It rose by almost 15 percentage points in Greece and by around 8 points in Ireland and Spain. According to the OECD, the rise in poverty during the crisis in recent years erased “a significant part of the gains in living standards achieved by low-income households over the past 20 years.”

What about young people? The OECD data show that they suffered the biggest income losses during the four years of the recession. Based on household disposable income (essentially, income minus taxes paid to, and benefits received from, the state), the young saw their incomes fall by 1% compared with a drop of 0.7% for older adults (25 to 65). In some countries, most notably Greece, Iceland and Ireland, the losses were much higher. The only group that didn’t suffer was the over-65s. They actually saw a rise in income, 0.9%, that was only slightly smaller than the loss among the young.

This data add to a picture of a long-term economic slide among young people. Today, they are the age group at the greatest risk of income poverty while the over-65s are least at risk – a reversal of the situation 25 years ago.

The OECD isn’t alone in trying to dig beneath the usual measures of poverty. Recently, the OPHI, a development research centre at Oxford University, released the latest edition of its Global Multidimensional Poverty Index. This seeks to measure deprivation not in traditional monetary terms – the famous “dollar a day” – but in terms of people’s ability to meet their basic needs, such as nutrition, and their access to what most of us would regard as basic services, such as clean water and schooling. As Oxfam’s Duncan Green notes, “being poor and sick is very different from being poor and healthy”.

Judged by this multidimensional measure, the number of people living in poverty in developing countries is not the widely cited figure of 1.2 billion but rather 1.6 billion. More than half of these live in south Asia with 29% in sub-Saharan Africa. What’s perhaps most striking is that most of them – about 71% – live not in “poor” countries but middle-income countries. Just as with the widening income gaps in the rich OECD countries, this continuing poverty amid growing prosperity raises a nagging question: Why isn’t economic growth benefiting more people?

Useful links

OECD Income Inequality Update (June 2014)

OECD work on inequality and poverty and inclusive growth.

OECD work on development.

 

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