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Poverty

A better measure of “shared prosperity”

In 2013 the World Bank announced that one of its two goals is to “share prosperity,” which is to be measured by the growth rate in mean consumption (or income) for the poorest 40% of the population.  (Its other goal is eliminating absolute poverty.)

The growth rate in the mean for the poorest 40% has the appeal of simplicity. But that comes with a cost. An important concern is that it does not tell us anything at all about how much rising prosperity is being shared amongst the poorest 40%, or how the losses from economic contraction are being spread. For example, the mean of the poorest 40% could rise without any gain to the poorest.

That limitation is important in the light of recent research. While the developing world as a whole has made huge progress in reducing the numbers of people living in poverty, much less progress has been made in raising the developing world’s consumption floor—the level of living of the poorest. (I show this here.) If we are really committed to sharing prosperity then we should surely not be leaving the poorest behind.

There is a remarkably simple fix for the Bank’s measure of success in sharing prosperity: Instead of measuring the growth rate of the mean for the poorest 40% the Bank should measure the mean growth rate of the poorest 40%. This may sound like some nerdy quibble, but it does matter. This subtle difference in the measure makes a big difference in its properties. With this change, the measure of “shared prosperity” reflects how equitably aggregate gains have been shared amongst the poorest 40%. If inequality falls (rises) among the poorest 40% then the mean growth rate will be higher (lower) than the growth rate of the mean. The mean growth rate of the poorest 40% is also quite easy to calculate from any two standard household surveys. (They do not need to be panel data.)

Let’s take a simple example. Suppose that there are four representative people comprising the poorest 40%, with incomes (in $s per day) of $0.75, $0.75, $1 and $1. After some economic shock or policy change their incomes are $0.50, $0.75, $1 and $1.25, i.e., there is a gain of $0.25 for the least poor, at the expense of the poorest. The growth rate in the mean of the poorest 40% is zero, while their mean growth rate is -2% (the average of -33%, 0%, 0%, 25%).

This change may still not be considered enough. There are other measures, although they often lose the advantage of simplicity. In more careful monitoring, a broader dashboard of measures will clearly be needed in assessing how well prosperity is being shared. For example, if one really cares about not leaving the poorest behind then one should also focus directly on that; there are now operational measures for that purpose, which are also easy to implement, as I show in this paper.

However, my point here is that one can improve the Bank’s measure with only a small change in wording. And the alternative measure can be implemented at virtually no extra cost in monitoring.

Martin Ravallion

(In the interests of full disclosure, I participated in the internal discussions at the Bank in 2012 about its goals. I am writing this post two years after leaving the Bank, and in the light of research since then.)

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