The economist recently ran an article titled For the first time ever,the number of poor people is declining everywhere.
That's a pretty amazing statistic if it's true, so I couldn't help but check
The article starts out by telling us:
The best estimates for global poverty come from the World Bank’s Development
Research Group, which has just updated from 2005 its figures for those
living in absolute poverty (not be confused with the relative measure
commonly used in rich countries). The new estimates show that in 2008, the
first year of the finance-and-food crisis, both the number and share of the
population living on less than $1.25 a day (at 2005 prices, the most
commonly accepted poverty line) was falling in every part of the world. This
was the first instance of declines across the board since the bank started
collecting the figures in 1981 (see chart).
Right off the bat I'm a little skeptical that the best estimates for
global poverty from anywhere in the world come from...a bank -- much less the
almighty World Bank. But that's just me, let's dig into the actual numbers.
The research from the World Bank defines a person in poverty as one who lives on
less than $1.25 a day, and these dollars are fixed at 2005 dollar values. So
their data tells us that, when adjusted for inflation, there are a smaller
percentage of people today living on less than $1.25 a day, than there have
been since 1981.
I couldn't help but wonder what the dollar has done since 1981. I found this
interesting chart from the Federal Reserve:
Isn't it rather interesting that the dollar index is virtually at the lowest
point it has been at since records began (even before 1981)?
I'm a big believer that hard assets have more stable value over time than
fiat, government-printed paper, which means they are a better measure of
value over time -- a better yardstick, so to speak -- so I also looked up a chart from
princedingold comparing US dollars with the price
of gold since the late 18th century (the relatively straight lines in the
beginning are due to the fact that the dollar was linked to gold up until 1971):
Again, we see that the US Dollar vs Gold is at an all time low. What this
tells us is that, nominally, the value of the US dollar is the lowest it has
been ever. This means that someone living off of $1.25 in 1981 was doing
much better off than someone living off of $1.25 today. Based off the first
chart above, let's say the dollar index was around 100 in 1981, and that it
stands right around 70 today. That means that today, you would have to live
on $1.79 just to have the same standard of living you had in 1981 with $1.25.
If you use the gold values from the second chart it's even worse. Based on that
measurement you'd have to live on closer to $3 a day today to have the same
standard of living you had in 1981 -- nearly 300% more!
These examples are all nominal, of course, and the World Bank tells us that they
are adjusting everything to 2005 dollars (what they did before 2005 I have no
idea). I don't know exactly how they are doing this adjustment, but I would
guess they are using something like the CPI.
Now, the CPI doesn't make for that good of a yardstick either. It has been
changed many times over the years, and during the recent housing boom,
the CPI didn't even include house prices! Right now the CPI doesn't include
food or gas prices, the two things whose price is increasing the most! So how
accurate can the CPI really be, and how accurate can adjustments made off of it
(or any similar measure) really be compared to real value. For those
interested, Doug Short has some great
alternative inflation measurements and
that are worth a look.
My point here isn't really to prove their numbers wrong, but just to point out
a few of the many problems with data such as this. Measuring poverty by those
living on X oz. of gold would have it's problems as well, so there is no perfect
solution. But if we did use the gold measurement, and adjust based on that,
I'd bet that the conclusion is probably very different.
Look, we all want poverty to go down, but the World Bank in particular has
an interest in making sure countries the world over want to take more of
their strings-attached loans to 'better their countries'. We've seen how the
banks act in the United States, does anyone think they act in the interest of
My personal opinion is that global poverty is likely on the decline, especially
over the long run. I believe there are many today worse off than they were
last year, the year before, or even in 1981, but in aggregate, I think it's
likely that the global standard of living is increasing. We are a resilient,
resourceful, and creative species, and we continue to progress and better our
standard of living.
The sensational title from the Economist states "For the first time ever..."
Really? Since the dawn of the first humans on this earth, this is the first
time global poverty has ever declined? I think someone was fishing for readers,
and hey, they got this reader to bite. But let's take their data with a huge
grain of salt.