Measuring Poverty and Living Standards [ Biz/ed Virtual Developing Country ]

The Virtual Developing Country is a case study of Zambia. This trip is the Rural Life and Agriculture Tour and this page looks at whether national income data can be used as a good measure of the levels of poverty and living standards.

Theories

Using National Income Data to Measure Poverty and Living Standards

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Economic growth is measured by an increase in the real GDP per capita. Can the same measure be satisfactorily used to indicate poverty?

The World Bank's uses a GDP per capita benchmark of US$370 as an indicator of absolute poverty. How reliable is this measure? Can we conclude that people living in countries with a GDP per capita of less that $370 live in poverty? Indeed, should measures of national income such as GDP per capita be used to measure poverty levels at all? Are there alternative measures that provide better indicators of poverty?

There are a number of problems that should be considered if national income statistics such as GDP per capita are used as indicators of poverty and living standards.

Failure to consider the distribution of Income
As with all mathematical averages, per capita income data does not take into account how the GDP is distributed amongst the population. If the income is unevenly distributed, then increases in the GDP per capita may disproportionately benefit a small group of high income earners and have little impact on reducing poverty. If GDP per capita data is to be used then its distribution must also be taken into account. The Gini Coefficient is used to measure how evenly income is distributed. The closer the Gini coefficient is to 100% the more uneven the income distribution.

The table below shows the comparative Gini Coefficient data for Zambia and four selected More Developed Countries (MDC's). The data suggests that incomes are more unevenly distributed in Zambia than in the other four countries.

Country Gini coefficient
Zambia 49.8
Netherlands 32.6
UK 36.1
Japan 24.9
USA 40.8

Failure to consider the effect of inflation
Using any monetary data, such as GDP per capita over time, must recognise that output and incomes measures can increase for many reasons other than the country producing more goods. It is an increase in goods and services that is necessary if poverty is to be alleviated or peoples' livings standards raised.

Output and incomes measures may increase because the rate of inflation has simply increased the money value of goods and service produced rather than their real value. Real GDP per capita would be a better indicator as this is a measure of the physical value of goods and services produced. Although the measure is expressed in money terms, it has been adjusted to take into account only the actual increase in goods and services produced and to disregard the effect of inflation increasing the money value of output.

A simple calculation using the consumer price index or GDP deflator allows you to convert nominal income figures into real income figures.

Real GDP = Nominal GDP x 100

GDP Deflator

Failure to include non marketed output
It should be remembered that GDP only includes output that involves a financial transaction i.e. is marketable. A considerable amount of Zambia's agricultural output is produced on small-scale communal farms for subsistence purposes. It is currently estimated that only 25% of production on communally owned land involves monetary transactions. The rest is not included in any national income calculations. Likewise the output of the informal sector will not be included.

Failure to include environmental degradation
Increasing national income and growth may occur at the expense of the environment. Rapidly growing economies may result in negative externalities. An agricultural sector that increases productivity by intensive use of pesticides and fertilisers or deforestation may reduce future land fertility and worsen the level of poverty for future generations.

Failure to consider the types of goods produced
GDP includes all goods and services produced. Much production is not concerned with producing goods and services that reduce poverty or raise current living standards. Increases in the production of capital goods and military goods will raise GDP per capita however may well reduce living standards as the opportunity cost of such production is the consumer goods foregone.

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