Income elasticity of poverty in developing countries: updated estimates from new data

Abstract

New data on poverty released by World Bank in March 2012 are used to provide estimates of income (growth) elasticity of poverty for 2005–2008 and to compare these with two earlier periods. Five points are noted. First, there is a big drop in the overall elasticity for developing countries for 2005–2008, indicating a considerably weaker response of poverty to increased income. Second, the drop is particularly sharp for $1.25 poverty rate but is fairly substantial for $2.00 line also. Third, the fall largely reflects a slowdown in poverty reduction in China from the extremely high declines in previous periods and the consequent drop in the elasticities for that country. Fourth, the elasticities, particularly that for $2.00 line, continue to be extremely low in poverty-dense India where $2.00 poverty rate is still higher than that even in sub-Saharan Africa (SSA). Fifth, the good progress towards the poverty goal of the Millennium Declaration is once again noted to be almost entirely due to the huge poverty declines that have occurred in China.

Keywords:

• poverty
• growth elasticity
• India
• China

JEL Classification:

• I32
• O15
• H10

Notes

¹ $1.25 per day in 2005 PPP is apparently the equivalent of $1.00 target stated initially at PPPs of an earlier period.

² Table 1.1 of World Development Indicators (WDIs) provides the rate of increase of GDP per capita for each year. The annual rate for each period is calculated by first deriving the total rate of increase over the period and then converting it into an annual compounded rate. The result is similar to a geometric average of the annual rates. It may be noted that the growth rates stated in WDI for ‘low & middle income’ group are taken as the rates for the group of developing countries. In fact, GDP growth rates stated in WDIs for ‘low & middle income’ countries are almost identical to the rates stated for ‘developing countries’ in Global Economic Prospects. For example, the GDP growth rate for ‘developing countries’ from 1999 to 2000 is stated as 5.5% in Global Economic Prospects 2002 (World Bank, 2002b, p. 3) and 5.2% in Global Economic Prospects 2003 (World Bank, 2003, p. 3), while the growth rate is given as 5.4% for ‘low & middle income’ group in WDI 2002 (World Bank, 2002a, p. 20).

³ It is interesting to note that poverty is mainly an Asian and African phenomenon. World Bank (2012, pp. 22, 71) shows that East Asia and Pacific (EAP), South Asia and SSA had 77.1% of developing country population in 2010, but had 96.3% of poor persons by $1.25 criterion and 94.9% of poor persons by $2.00 criterion. On the other hand, Europe and Central Asia (ECA), Latin America and Caribbean (LAC) and Middle East and North Africa (MENA) contained 22.9% of developing country population, but only 3.7% and 5.1% of poor persons by $1.25 and $2.00 criteria.