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Jim Frost

Quality Insider

Statistically, How Thankful Should We Be? Part 2

Assessing global poverty

Published: Tuesday, November 19, 2013 - 18:50

In part one, I looked at how personal income levels fit into the global distribution of incomes. I’d be the last person to suggest that higher income guarantees more happiness. I’ve visited a number of developing countries, and as long as peoples’ basic needs are met, they seem to be just as happy and hard working as people here at home.

So instead of personal income levels, I’d like to assess something more meaningful: global well-being. How does the overall global welfare today compare to 1970? Are more people getting their basic needs met? That’s what we’ll look at in this article, and there’s good news here.

To evaluate global well-being, I’ll assess how global poverty and income inequality have changed.

Global poverty levels from 1970 to 2006

Depending on the organization and year, there are several official poverty lines for developing countries. I’ll use the $1 a day poverty line, which equates to $312 U.S. dollars in 2006. Using the other common poverty lines (i.e., $2 and $3 a day) produces similar results.

Figures 1 and 2 are representative examples of developing countries to illustrate the global trend of decreasing poverty levels. The shaded regions in the graphs show how the proportions of those living below the poverty line in Ecuador and rural China have dropped remarkably since 1970.

Figure 1: Poverty level in Ecuador from 1970 to 2006

Figure 2: Poverty level in rural China from 1970 to 2006

The same pattern applies to the United States as shown in figure 3. Although it’s hard to match a single per capita income value to the different household sizes and incomes that the U.S. Census Bureau uses to measure poverty, a per capita value of $5,000 is close for most household sizes.

Figure 3: Poverty level in United States from 1970 to 2006

The graph in figure 3 shows that the percentage of those in the United States with a per capita income of less than $5,000 has dropped from 5.6 percent to less than 1 percent.

To assess poverty changes on a global scale, Pinkovskiy and Sala-i-Martin combined 119 country distributions, and found: “Using the official $1/day line, we estimate that world poverty rates have fallen by 80 percent from 0.268 in 1970 to 0.054 in 2006. The corresponding total number of poor has fallen from 403 million in 1970 to 152 million in 2006…. We also find similar reductions in poverty if we use other poverty lines…. We learn that not only are poverty rates falling, they are falling faster than population is rising.”

Global income inequality from 1970 to 2006

Poverty rates have dropped significantly over the past 30 years, however, income inequality within most countries has increased. I want to determine whether this negatively affects global well-being.

You can see the increasing inequality in the scale parameters that generally increase over time, and produces a wider spread in the graphs. There are more complex measures of inequality, such as the Gini coefficient, but I’ll illustrate the principle using the income ratio of the 90th and 10th percentile of earners in the United States.

Figure 4: Income ratios of the 90th and 10th percentiles of earners in the United States

The graph in figure 4 displays the per capita income values for the 10th and 90th percentiles in the United States. The ratio of the high to low incomes increases from 5.3 in 1970 to 6.6 in 2006. A similar pattern exists for most countries and indicates that income inequality is increasing within countries.

Although increasing income inequality may sound detrimental, keep in mind that it occurs during a time where both the proportion and absolute counts of people living in poverty are sharply declining. Also, counterintuitively, income inequality is increasing within most countries, however, it is actually decreasing globally.

The two graphs in figures 5 and 6 use China and the United States as examples to show how this works. I picked these countries because they both have large economies and are representative of the global trend. In part one, I compared these two countries to show how different they were in 2006. However, in 1970, they were far more different. Over the decades, China’s income distribution has gained ground.

Figure 5: Income inequality in China and the United States in 1970

Figure 6: Income inequality in China and the United States in 2006

The graphs in figures 5 and 6 highlight the regions where the two economies overlap in 2006. However, in 1970, there was almost no overlap. I shaded the range of $2,500–$7,500 for Chinese incomes in this overlap zone to illustrate the Chinese gains over time. In 1970, virtually no Chinese had per capita incomes in this range, but by 2006, 53 percent were in this range. Also, note how the distribution for each country has a wider spread, which indicates that the within-country income inequality is increasing.

The global picture follows the same pattern: Within-country inequality has increased but the between-country inequality has decreased by an even greater amount. The net result is that global income inequality has decreased.

In short, income equality in 1970 was greater because more people were very poor. Inequality has increased since then because fewer people are living in severe poverty.

Perhaps the growing within-country inequality isn’t as bad as it first seems?

Pinkovskiy and Sala-i-Martin conclude, “We find that various measures of global inequality have declined substantially and measures of global welfare increased by somewhere between 128 percent and 145 percent.”

Closing thoughts

All in all, I think this is great news and something we can all be thankful for. Poverty levels are sharply down and measures of global welfare are increasing. Income inequality is increasing, which simply reflects the fact that there are far fewer people living in poverty.

Still there is a long way to go because severe poverty has not been eliminated. In today’s world, severe poverty is generally found in Africa where the rates actually climbed through most of this time period and only recently began a slight decline. According to Pinkovskiy and Sala-i-Martin, “Welfare unambiguously deteriorated in 23 countries, totaling less than 5 percent of the world’s 2006 population.”

Looking beyond incomes, there are countries with human rights violations that are not reflected in these promising results. There are also the issues of unequal rights and opportunities.

That said, these findings were a nice surprise to me; usually you only hear the bad news. The decrease in poverty is a longstanding trend that has persisted throughout the decades, which is a great sign for the future.

Happy Thanksgiving!

Discuss

About The Author

Jim Frost’s picture

Jim Frost

Jim Frost is a statistical technical communications specialist at Minitab Inc. He has a background in a wide variety of academic research and became known as the “data/stat guy” on research projects that ranged from osteoporosis prevention to quantitative studies of online user behavior. At Minitab, he is a technical writer who helps people use Minitab software to gain insights from their own data, whether they’re working in quality improvement, academic research, or another field entirely. He also writes in The Minitab Blog about various experiences and practical knowledge he’s learned along the way that may help others’ research endeavors.

Comments

Being Happy

Interesting article and appreciate your insight.  There is a tremedous difference in "happy" and "joy", i.e., circumstances/situational versus despite circumstances/situation and it's too bad that income is used as world's the definition of poverty, all could be rich but still poor in what really matters, "For what is a man profited, if he should gain the whole world, and lose his own soul?"  Poverty is a symptom of a deeper problem with respect to mankind.  Having the opportunity to spend time in China and my home of the US we should all be very thankful.

Being Happy

I agree completely. I've been to a number of developing countries and, all in all, people in these countries seem as happy as folks at home despite differences in income. As I wrote in part 1, I wish more countries were like Bhutan in that they measure happiness and include it in their development plans. Unfortunately, it's easier and more concrete to measure something like income. Jim Frost