Is there a nutrition-based poverty trap?

In economics, a poor individual is one that lacks sufficient financial resources to obtain adequate food, clothing, and medical care to participate in society. For a long time, medical science and psychology have highlighted the role of food and calorie intake in human development but, in economics, we are still quietly overlooking the effect of nutrition in poverty.

Though malnourishment may be history, famine is not. In fact, FAO, Food and Agriculture Organization of the UN, estimates that, worldwide, 842 billion people were undernourished in 2011-13.

Poor people have smaller budgets, which means a greater share of their expenditure is adjudicated to food. So, it comes without surprise that, the large increase in food prices witnessed in the end of the last decade (2006-2008 and again in 2010) had severe consequences such as decreasing the nutritional status of the poor and forcing them into a vicious cycle – also known as poverty trap, which is a spiraling mechanism that forces people to remain poor.

The idea is quite simple, with wage people buy food which gives them strength to work and earn wages. This establishes a relationship between income today and income tomorrow.

A necessary condition for a poverty trap to exist is that the capacity curve intersects the 45-degree line from below at some point (S-shape curve).

The S-shape curve is made of two relations, or functions: the relationship between wage and nutrition (how much better do you eat if you have little more income) and the relationship between nutrition and productivity (how much stronger do you become if you have a bit more to eat).

Assuming this hypothesis holds means the poor should eat as much as they can – after paying for unavoidable expenses, expenditure on food would first increase more than proportionately, and then less than proportionately. In economics, we say this exposes the decreasing marginal effects of increasing food consumption: the first calories are just used to survive, and the next ones are used for strength; as calorie intake increases, the marginal effect of consuming them decreases.

But if nutrition is so important, why don’t people spend every available cent on extra calories? What stands in the way of better nutrition for the underprivileged? And what are the possible policy implications of this?

To better understand the behavior of the poor we can start by looking at their choices. From PoorEconomics we know that, worldwide, people living with less than 1$ per day spend 45-75% of their household budget on food. The difference may be due to food prices but it also underlines different consumption choices.

The poor have two ways of increasing their calorie consumption: they can eat more by spending more money on food (quantity) or they can eat differently by spending money on more nutritious options (quality).

So, how does calorie intake relates to the poor? Angus Deaton estimates a regression function for log calories and log per capita expenditures in India and concludes that when total expenditure increases by 10%, the consumption of calories increases by about 3.5%. The fact is that, when given the possibility of spending more money on food, people have to choose between eating more and eating tastier food. For example, rice has higher nutritious value than shrimp but when given the possibility to spend more money on food, people may choose to eat more shrimp instead of only eating rice because it tastes better.

It would be interesting to discuss both income effects and substitution effects to better illustrate on this matter but, in summary, a poor household who is 10% richer spends about 7% of the increase on food, and this extra spending is shared 50/50: half on more calories and half to get better tasting or more expensive calories. Even among the poorest of the poor, an increase in economic well-being has a positive, but less than 100%, impact on calories consumed.

Numerous countries use food subsidies and food stamps to encourage greater nutrition. In India, for example, the government recently introduced a subsidy scheme for rice.  But before tackling the issue it is important to know if there actually is a poverty trap. If the previously discussed assumptions hold, a poverty trap opens the possibility of a “big push”: a minor action could have big benefits, which is socially desirable. But, if there is no real poverty trap, helping the poor in this way will simply be a form of wealth redistribution without efficiency gains.

 

Helena Isabel Rodrigues

Do the poor have enough money to buy things for cheap?

It’s expensive to be poor.

This observation may seem to have come out of the blue – nevertheless, it is not unusual for the poorest among us to end up paying a higher price per unit of consumption. Poor people tend to pay more to buy and borrow. This price differential goes by the name of poverty penalty.

In developing countries, poverty penalties mainly arise due to institutional obstacles and physical barriers, preventing the poor from gaining access to the same markets as those who do not live in a situation of poverty. These types of obstacles are sparse in developed countries: even still, citizens in these countries also suffer from poverty penalties, except that they come into fruition through different mechanisms – market ones.

When market mechanisms are left to work for themselves, their standard functioning tends to punish the poor. According to Dalsace et al., unfavourable cost and price structures, among others, can lead to a price-wise discrimination of the poor. If a cost structure is ill-fitting to small-quantity purchases – because, for some companies, the unitary cost of production of certain goods will be higher when the quantity produced is smaller – it can be harmful for the budget of the poor. This happens because households generally use savings strategies which imply greater short-term expenditures in exchange for longer-term savings. A good example of this type of savings behaviour is buying in bulk, or accelerating acquisitions so as to enjoy temporary discounts. Even though the poor have greater incentives to take advantage of these discounts than the rich, they have less possibilities to do so, as they commonly have smaller liquidity (or only have it closer to their payday). Orhun and Palazzolo studied this by analysing data on toilet paper purchases: it is typical for a poor household to not be able to purchase a 30-unit pack for €24, and instead end up buying a 4-unit pack for €5. On top of paying a higher unitary price, by getting the smaller package the poor are less likely to be able to build a sufficient inventory. Thus, they most likely won’t have the means to wait until the next discount comes around, and whenever they run out of the good (especially when we are talking about essential goods) they will have to go to the store and get it, at whatever price it costs in that moment. Poorer households’ relative inability to purchase in bulk and on sale will have a compounding effect, aggravating the poverty penalty: not being able to take advantage of buying in bulk will hinder their ability to enjoy temporary discounts, and vice-versa. Orhun and Palazzolo found that the financial losses low income households incur due to underutilisation of these strategies can be half as large as the savings they accumulate by purchasing cheaper brands. Lower-income households ended up paying 5,5% more per roll of toilet paper than they would if they were able to buy more in the likes of high-income households. On top of this, poorer households are less likely to own a car, and hence may not be able to easily access cheaper supermarkets. If their food choices are also limited due to transportation constraints, poor households may have to incur in greater food spending, buying their necessities at a more expensive, but more easily accessible corner store or supermarket.

In regards to changes in the price level, the poor also take a greater toll. The prices of items which make up the greater part of their budgets (like food or rent) have had a faster rise than those of other types of goods. Even though decreasing oil and energy prices apply contrary pressure to this tendency, usually the poor own fewer cars, and hence will benefit less from reduced oil prices.

With lower and more irregular incomes, the poor may have frequently unpaid bills and a negative balance on their bank account (if they can afford to have one) – hence, they are considered less creditworthy. All of this increases poor people’s impotence in the face of the market – when they have limited liquidity, their needs are high and there are few options to choose from, they will see their power severely diminished. Inequality is worse than income figures alone make us believe, as the constraints around poorer households’ spending patterns make them incur in higher costs.

All in all, there are a lot of opportunities to save money – you just need to have enough money to enjoy them.

Madalena Páscoa

Investment in Education and Social Mobility

Several studies in economics have shown that there are three important ideas regarding human development. The first is that cognitive ability influences future adult outcomes, such as wages ( paper by Murname and Willet). The second is that wages and schooling are affected by both cognitive, usually measured by test scores and IQ and non-cognitive abilities, such as motivation, perseverance, attention or self-confidence ( paper by Heckman et all 2006). And the last is that skills and abilities are determined both by genetics and environment (Rutter 2006).

There is also evidence that children’s abilities and skills are correlated with parental education and mother’s ability, and that gaps in ability become evident at the early age of five and usually remain until adulthood. However, the results from experimental programs implemented at early ages in the US, which focused in the physical, mental and social development of poor children show that they were effective in reducing the gap in ability of children from disadvantageous environments, promoting social mobility. However, the effect is reduced if other investments do not follow ( paper by Heckman et all -2008).

The evidence described above suggests that not all investment in education has the same impact and as such, investments in different stages of the development of the child should not be seen as perfect substitutes. In the model presented in a paper by Heckman (2007) the stock of skills at each point in time depends on the parental characteristics (cognitive and non-cognitive), on the child’s skills at birth, and on all the investments made in the previous periods. As a result, the investment in a certain period is more productive when the stocks of skills acquired in previous periods are higher (dynamic complementarity). And, a higher stock of skills in one period, both cognitive and non-cognitive, will lead to a higher future stock of skills (self-productivity).

Considering the previous model, a child whose parents have a lower level of education will have a lower stock of skills to begin with. Moreover, technical and financial constraints will negatively influence the level of investment in education in the first periods. After some periods, the gap in the stock of skills between a child from an underprivileged environment and a child whose parents have a higher level of income and education will become evident. The difference in stocks of skills will make future investments less productive, thus for similar levels of future investment the gap will perpetuate.

When considering policies to reduce gaps in skills that result from low stimulus family environments and investment constraints, there are two options. The first is to invest more in early periods of the child’s life, making future investments more productive. The alternative is to invest more in later periods, with lower levels of return. The efficient option is then to invest more sooner rather than later and keep investing in later periods. Empirical evidence from early intervention programs, in which disadvantage children are able to access high quality pre-school care show that the gap is reduced, and remains reduced if further investment is made in the future.

In Portugal, preschool care is not mandatory (Lei Quadro) and usually not present in public discussion. More important, as mentioned in Diário de Noticías the public provision currently only currently guarantees places for children over the age of five, although the government has the intention to expand the offer for children over the age of three in the next years. As seen above, the gaps in skills are already evident at that age of five, thus provision of this programs for children with three years old is according to the evidence of great importance. Provision of preschool care is not by itself sufficient to close the gap. The quality of the institutions is also important and should be part of the governments concerns.

To promote social mobility and equal educational opportunities evidence shows that it is more productive to invest in the early stages of the development of the child and that evidence for some countries, such as the US, indicate that the return in such investment will be positive to the society, as consequences of a lower crime rate, higher wages and better health. Investments in later periods may also have results, but they would be more costly and they might not get to all the children.

Mónica Simões

New learning methods to help escape Poverty

Why education is relevant to fight poverty

Children have the right to an education and it plays a major role in political, social and economic development of a country. Moreover, education gives people the skills needed to help themselves create a better life, and even escape the poverty trap. Several problems found in developing countries may be solved through education alone, as it improves health (e.g. people with primary education are less than half as likely to contract HIV and other diseases), enhances economic growth (e.g. no empirical support for a country to achieve continuous and rapid growth without a minimum of 40% adult literacy rate) and promotes political stability (e.g. people learn about their rights and how to exercise them which help to fight corruption and provide better suited governments).

Why computer-based learning matters

The use of computers in education has been found to be an effective way to tackle numerous flaws of the current educational systems, mainly in developing countries. For the first time in history they provide individualized interactivity, a key missing ingredient until now. James Kulik showed, in the early 90’s –  i.e. before computers became part of our daily life – that, not only students learn more and in less time, but also like their classes more when they receive computer-based instructions.

What’s Khan Academy

The Khan Academy is a free online learning platform, created by Salman Khan, which has been hailed as the “world’s teacher” and the “Messiah of Math” by Bloomberg. This revolutionary platform contains thousands of videos in a myriad of areas, and almost infinite amount of interactive exercises, real-time data and analysis features. For these reasons it has become a worldwide phenomenon, with more than 32 million users, in just a few years.

The growing website has material in almost every area but math is without a doubt its main strength. The students engage in a game-oriented, self-paced and individualized learning setting while the teacher is able to monitor every action.

Research in USA and Chile

In a study conducted on schools from Chile, the authors discovered that students from schools that were using the platform spent more time on math exercises and did better on the year achievement tests. Likewise, students asked more questions and where much more engaged in learning the subject.

Moreover, an investigation on several US schools that incorporate the Khan Academy in different settings, found “large, significant differences in spring test scores compared to students who attended the school before the change in math instruction”. Students who spent more time on Khan Academy experienced greater than expected outcomes, reduced math anxiety, and had higher confidence in their ability to do math. Additionally, 45% of them self-report increase in learning autonomy, 71% enjoyed using it and 1/3 agreed they liked math more since its implementation in the school. Teacher’s perceptions of the software are also striking: 90% would recommend it to other professors, planned to use it on the next year’s class and said it enhanced their ability to monitor students’ knowledge, thus helping to properly tackle students who were struggling or ahead of class.

Implementation in Developing Countries

Although internet access is still a big issue – only 35,5% of the world population has it -, there has been a growing number of innovative solutions. World Possible (non-profit NGO) has developed a hardware called RACHEL that works as an offline Google, including: Wikipedia, Khan Academy, textbooks, Gutenberg World Literature, UNESCO Primary School resources, etc. It has been working with several community-based organizations, which distribute hardware like Raspberry Pi (costs less than $40) so that anyone can install RACHEL and, if connected to a router, add content or even became a server for others, all free of costs. Thus, making it possible to implement K.A. in schools from poorer regions.

Would it work in developing countries?

In order to test this pioneer hypothesis, one could conduct a randomized field experiment in schools, with both control (traditional learning) and treatment (K.A. in schools) groups. The treatment would consist of in-depth tutorial of the platform to teachers and students, and math test’s scores would be the dependent variable. After controlling for pre-treatment differences between groups, implementation the platform follows, and after at least one year, one could recollect the data (scores and a set of individual characteristics) and run a Difference-in-Difference regression: if the treatment dummy is significant we confirm that this new method of learning improved the students’ performance.

Y_iPOST= β_0POST + β_1POSTTreatment_i + β_2POSTX_i + u_i

With sufficient low-cost hardware solutions, like RACHEL, it should be possible for students from the third world to acquire knowledge and skills, through platforms like the Khan Academy, Wikipedia and Youtube, guiding them in the direction to escape poverty.

 

Alexandre Mergulhão – 786 / 18572

 

Bolsa Familia – The magic program for poverty reduction?

“If at the end of my term every Brazilian person has three meals per day, I will have fulfilled my life’s mission,” said the former Brazilian president Luiz Inacio Lula da Silva. Thus, Lula initiated the conditional cash transfer program called “Bolsa Familia” when he became president in 2003. Bolsa Familia provides monetary benefits to poor households with school-aged children, which fall below an extreme poverty line. The poverty line is based on the price of a basket of basic goods in one’s region. In order to receive the benefits a regular child school attendance as well as a participation in health care programs is mandatory. In case the child misses out on more than 15% of the classes, the payment is suspended. The objective of the program is to break the intergenerational poverty cycle. At the moment families in need receive about 22 Reais (12$) per child on a monthly basis. The total annually amount spent on the program accounts for 0.5% of the Brazilian GDP. Meanwhile Bolsa Familia is the largest program of effective social policy in the world and was adapted by more than 20 countries. Nowadays the Brazilian program serves 41 million people, which account for 22% of the Brazilian population and was so far able to take 21 million Brazilians out of extreme poverty. According to the IPEA’s poverty lines, the poverty headcount index fell from 35.8% in 2003 to 21.4% in 2009.

Having a deeper look into the distribution of the cash transfers among the poorest, it can be seen that the participating households in the program were mainly from rural areas. The participation rate of households living in the major cities like Sao Paulo and Rio de Janeiro was less than 10%. Knowing that nowadays 46.7% of the people living in extreme poverty are from rural areas and 53.5% from urban areas, raises the question if Bolsa Familia favors the support of households living in rural areas and creates inequality among the poorest in the Brazilian society. In this context, it is often criticized that the program does not address sufficiently the imbalance of living costs. Thus, households in urban areas receive a lower monetary benefit compared to the ones in rural areas. Living costs in Sao Paulo are more than twice the costs of living in rural areas in the Northeast. According to Rocha (2008) is the poverty line in rural areas in the Northeast at a value of 64.47 Reais per month while people in Sao Paulo, who earn less than 250 Reais on a monthly basis are considered to fall below the poverty line. This shows clearly the difficulties the program has to help poor families out of extreme poverty in the main cities of the country through its cash transfers. Apart from the disparity in the costs of living in urban and rural areas, it is more likely that children live in cities, which are economically incentivised to drop out of school and enter into child labour. At that point it should be mentioned, that out of the 13.000 households, which lost the conditional cash transfer due to low school attendance, the majority of the households lived in Sao Paulo. Children in urban areas have more job offers and see a higher benefit in leaving the program than it is the case for children in rural areas. Children living in rural areas are more likely combining work and school as they work more often in the agriculture sector, which depends on the seasons and is better compatible with the required school attendance rate. Bolsa Familia addresses old poverty problems while providing children with adequate access to education and health care. New poverty problems like violence, drug addiction, family breakdowns and environmental degradation, which are more likely problems children are facing in cities, are not addressed by the conditional cash transfer program.

The disparity of living costs in rural and urban areas, the child labour and the new poverty problems show clearly that Bolsa Familia is not the ultimate “magic” program to reduce poverty in an equal way. Bolsa Familia was initially implemented to incentivize poor households in rural areas as they were disadvantaged by several social benefit programs in 1990s. Further, the program had a great impact on the poverty reduction in Brazil, nevertheless the government should adapt the program according to the recent circumstances. Therefore, the program should implement conditions linked to the new poverty problems and it should provide families especially in urban areas with equal chances to escape from the intergenerational poverty cycle.

Sandra Kusterer #2711

Homelessness in the Rainbow State

Before starting to read this blog post I suggest you peruse the Cracked article on “6 Insane Realities of Being Homeless in Hawaii”. The article isn’t written by a scholar, but it is, however, written from the perspective of two current homeless men in Honolulu, Hawaii’s most populated island.

It is also crucial to understand that in the United States the poverty-line is established at a federal level and the same poverty threshold holds for the entire USA albeit with three exceptions in the form of Alaska, D.C., and Hawaii. These differences from the federal poverty line to the “exception guidelines”, however, are derisory and the subsequent lack of distinction in this definition leads to the curious fact that the state of Hawaii has the 9^th lowest unemployment rate at 4.4%, the 7^th lowest percentage of people with income under the poverty line at 11.4% – as opposed to the nationwide average of 16% – and yet boasts the highest amount of homeless people per capita in the US.

The main cause of homelessness in Hawaii isn’t unemployment, but instead the fact that a large chunk of those employed can’t afford housing on the island. This is due to the fact that housing in the Rainbow State is 50% above the nationwide median, yet the average income per capita is merely 3% higher for the same two places.

If a substantial portion of employed people, let alone those unemployed, cannot afford housing on the island, then why is the percentage of people living below the poverty line so low? There is a simple answer to this question: It isn’t. The Census Bureau has worked to develop a supplemental poverty rate, whereby one of the primary differences between both poverty measures is housing costs. Accordingly, the two states with the largest increases in terms of poverty with the supplemental poverty measure— California and Hawaii — are the states with the highest cost of renting a house. This supplemental measure positions Hawaii at an 18.4% poverty rate, far above the official poverty rate stated above.

In fact, the Bureau of Economic Analysis has concluded that the metropolitan area of Hawaii has the second highest regional price parity in the US. This means that the price levels of goods and services are 16.2% more expensive in Hawaii when compared to the US overall of 100, yet the the income per capita has only a slight increase over the remainder of the US.

Furthermore, according to MIT’s Living Wage Calculator, the required living wage in Honolulu for a single adult is $14.66 per hour, which is in staunch opposition to the poverty wage of $6 per hour.

With the state now receiving a record amount of tourists, the mayor of Honolulu has now banned people from sitting or lying on busy sidewalks from 5am to 11pm in a bid to limit interaction between tourists and homeless people. This, coupled with the constant tearing down of homeless encampments, has led to the very vulnerable situation felt not only by the working portion of the transient population – now facing a trade-off between going to work and leaving their tent, with the risk of returning to an empty park or beach, or staying by their temporary home – and those who need to be actively looking for work.

Fortunately, the governor of Hawaii has recently declared a state of emergency about homelessness in the archipelago and there are now two solutions I can envision, one short and another medium-term (a long-term solution cannot be properly delved into within a blog post limit, as the underlying issue is the unbelievable prices of housing in Hawaii). The short-term solution is to put the $12 million approved on the 5th of May to use, not through the proposed alienating of the homeless population to Sand Island, which has already started, but through Housing First plans where the city provides housing for those who work and yet cannot afford permanent housing up-front.

Hale Mauliola with single person units featuring 3 people per container. Sand Island homeless camp. 19 nov 2015. photograph Cory Lum/Civil Beat

Sending the homeless population to Sand Island is no solution, it’s a status quo thumbs-up from the local government: by having homeless people isolated and away from job prospects and opportunities disables them even further. The medium-term solution is much more complicated, as employment is already extremely low in Hawaii, leading me to believe that the only solution is to encourage further companies and businesses to develop on the island, be it through attracting foreign investment or through harboring entrepreneurial solutions from within. This needs to be done through NGOs such as SAPANA in Portugal, who is now thinking of opening a social incubator for ideas stemming from homeless people.

 

Francisco Duarte Lopes

2497

The Best Social Program Isn’t Work

Ronald Reagan famously summarized one of the most influential ideas in combating poverty: the “best social program is a job”. This was the European Commission’s position back in 2011, when they wrote that ‘a job is the best protection against poverty’. (p. 176)  This blog post will seek to assess whether employment is an effective anti-poverty strategy. It should be noted this does not judge whether it ought to be.

Despite economic growth, increasing employment rates and a consolidated welfare state, in a recent working paper for the Luxembourg Income Study, Nieuwenhuis et al. recall that “poverty rates for working-age people and children either rose or stayed stable, with only few countries reporting a significant fall.” (p. 3)

While, “households are consistently found to be less likely to be poor when at least one household member is employed” (p. 4), simulations of the potential impact of reaching the EU2020 75% employment target on poverty have found this increased employment would bring only small decreases or even increases in poverty rates, due to the increase in median incomes and thus the poverty threshold. (p. 480) This is a typical example of the aggregation paradox (p. 6)

The question of employment as an anti-poverty tool has been a gendered one. Using SILC data, Marx and Nolan (p. 142) show that there is almost no income poverty risk for low-paid workers who are the 2^nd earner in the household, often women. In recent years, it has been women who have seen the biggest increases in employment, motivating Nieuwenhuis et al. to assess this employment-poverty relationship by focusing on women’s employment.
While “in the majority of countries, a rise in women’s employment rates has been associated with an increase in working-age poverty rates”, (p. 4) Nieuwenheis et al. note that “had women’s employment not become more common, poverty would have risen more; in some countries even substantially more.” (p. 22) Nieuwenheis et al. find that “typically, since the mid-80s (…) a 10 percentage point increase of women’s employment was associated with a poverty reduction of 1 percentage point.” (ibid) While this is a significant relationship, it is not a good indicator for those arguing ‘a job is the best social protection against poverty’. These decreases in poverty took place over a long period of time and were so substantial as to make them unrepeatable.

Contrary to popular opinion, Marx and Nolan (2013) find that low pay has remained relatively steady and is not greater in less regulated, more service-based or Anglo-Saxon economies. However, they also find that low pay is not a key driver of in-work poverty. In 2001, the authors found that 80% of low-paid workers in the EU15 were in the 3^rd-5^th disposable income quintile (p. 140). Instead, they show that in-work poverty is fundamentally caused by low work-intensity, single-earner and single-parent households. Nieuwenhuis agrees, citing de Beer (2007)’s findings that “most of the additionally employed people belonged to work-rich households” and Gregg and Wadsworth conclude that “while the share of households where everyone is in paid work has grown, the share of jobless households did not decrease.” (p. 7)

How can we revigorate the negative work-poverty relationship? Minimum wages (MWs) have been highly popular strategies of keeping work as “the surest way out of poverty”. California and New York increasing to a $15/hour MW, the introduction of a national minimum wage in Germany, and the ‘living wage’ movement in the UK.  In a recent conference presentation (presentation sent by authors to student, available upon request), Marx and Nolan have shown how minimum wages are inadequate to keep workers out of poverty for most countries, except when they are the only person in the household. This is demonstrated in the following graphs:

Net incomes of minimum wage workers relative to the povery line, 2012, single persons

Net incomes of minimum wage workers relative to the poverty line, 2012: lone parent, 2 children

Net incomes of minimum wage workers relative to the poverty line: single earner, 2 children, 2012

Today, employment is not a way out of poverty for many who are in involuntary low work-intensity, a growing proportion of workers and a large share of those recently employed (p. 29). As can be seen in Chart 34 of the European Commission’s Employment and Social Developments 2015 report, a high proportion of those who are unemployed and find work do not leave poverty.  In light of this, a combination of predistribution through minimum wages and redistribution through tax credits and benefits can be effective in making work pay. In this way, we can fix the employment channel out of poverty. However, we ought not to forget that there can be no employment channel unless there are jobs for people to take.

Miguel Oliveira Pires Costa Matos, 25220 / 872

Impact of natural disasters in poor countries

Does nature discriminate? Why is it that a natural disaster such as an earthquake of the same magnitude makes so much more damage in Ecuador or Haiti than in Chile or Japan? The facts are that over 90% of deaths caused by natural disasters occur in poor countries. This is due mainly to the fact that poor tend to live in more dangerous areas, such as steep hillsides prone to landslides or riverbanks and sea shores prone to flooding because they cannot afford safe land. Moreover, their houses are constructed of less quality materials; therefore they suffer more destruction and are less protected of debris falling on them. To illustrate this, we can take the example of the recent earthquake in Ecuador where 80% of the city of Pedernales is considered destroyed, only the houses constructed in rich areas and with resistant materials still stand up.

Here we have only one dimension of the problem; recovering after the calamity is the hardest part. First, we need to think about orphans, many children end up without no one to take care of them and are easily exposed to exploitation of various sorts that can go from having to work on the streets to sexual trafficking. There is also not enough trained social workers in those areas to deal with the children’s trauma. After a disaster, diseases spread quickly, the affected areas don’t possess enough doctor or hospitals, not even enough medicines to deal with all these people, moreover clean water and available toilets become limited which help to expand the contamination and the different kind of infections. Their savings are limited to buy food and other basic necessities to live in a dignified way and in general the poorest people does not possess insurance.

In the big picture, the reaction power of the government to such an event is lower than in rich countries since they tend to have already debts to pay, they have little to nothing of money available for post disaster development. Basically, they depend on rich countries for debt cancellation and resources to generate development and rebuild cities. The president of Ecuador (an economist) said that best way to help recover from this inevitable circumstances would be to re-activate the economy by travelling to the affected area, this kind of solidarity is harder in poor countries since even the people that weren’t attained by the phenomenon cannot afford this kind of help. And even with the resources for that, good intentions aren’t enough, you need experienced professionals, which are scarce in those countries, to take care of the situation.

Natural disasters are an unavoidable risk to every society and of course it is extremely hard to make all countries respect security norms that would minimize the damage. The solution to this events is naturally the sustainable development of the countries, but meanwhile it would be an interesting matter to see the international community assume that risk as a whole; a kind of international insurance in which every country would have contributed that would be reserved for this kind of emergencies. This would permit the quick arrival of goods of primary necessity and competent workers to the affected areas to minimize the damage and have a rapid reconstruction.

Tarek Abdo

WHAT LESSONS CAN DEVELOPED COUNTRIES LEARN FROM DEVELOPING COUNTRIES?

Poverty is a broad and multifaceted concept, usually interpreted as the lack of minimal financial resources to obtain adequate food, clothing, shelter, medical care and to participate in society. It is not bound to the lack of material possessions or money but also includes several social, economic, cultural and political elements. Commonly associated with developing countries, with many people affected worldwide and severe consequences to the development of countries, poverty in developing countries has a multiple number of causes, and preexisting conditions – colonial era – have been hindering development and convergence to developed countries. The ineffectiveness of aid given to developing countries is one of the main drivers for poverty maintenance. Billions of US Dollars are received each year but its effective use remains an issue. Additionally, having a strong government that doesn’t hinder development, allowing for entrepreneurial initiatives and the good use of natural resources, for privatizations and foreign investment to come in, for multinationals to operate and for small businesses to access special credit conditions, discouraging child labor and improving educational systems by creating incentives for teachers and students to attend and succeed, and mainly keeping institutions functional and corruption-free, are also key factors to determine whether a country remains underdeveloped or takes off towards convergence.

However poverty is not limited to developing countries. Although in a lower scale, dealing with different issues and realities and frequently triggered by specific events instead of pre existing conditions, developed countries also face poverty and its multidimensional consequences: social exclusion, deprivation, homelessness, diseases, precarious labor, poor wages, nutrition and health care, lack of holidays or education for children, gender inequality, race discrimination, etc. But if the country is developed and has the means, why doesn’t it fix poverty? It raises a moral question about the kind of country we want to live in. The poor are frequently stigmatized and blamed for their poverty and what causes it, as if it’s a choice or failure, a matter of laziness or irresponsibility. And similarly to the increasing gap between developed and developing countries, the gap and divergence between rich and poor people also increases, not setting a good example for emerging economies that want to tackle underdevelopment and giving the idea that people are left alone, a damaging idea of society where no one wants to live.

It seems obvious that developing countries can learn from developed countries, but what about the other way round? According to the World Psychiatry Association, there’s a strong stigma associated to diseases and mental illnesses in developed countries. Improvements can be made regarding how people are treated, highlighting positive qualities of an individual and externalizing symptoms rather than internalizing them into their lives and social relations. A strong culture of family and community behavior in developing countries favors integration and belonging and could play a big role in overcoming exclusion, encouraging recoveries and improving treatment effects. How we treat our elder people is also determinant. Developing countries value veterans for their knowledge and wisdom – guides and consultants for several life aspects – rather than confining them to nursing facilities where they languish in poor conditions for the remaining of their lives. A lot of humanitarian work is also done in developing countries by people from developed countries, but with so many volunteers enrolling in overseas volunteer work and aid each year when there is so much to do internally, a better resource management to re-aim efforts would help to fight domestic poverty. Additionally, people in developing countries frequently live a simple life and this can teach some important lessons about the standards of affordability, saving, waste and what is essential, helping to redefine mentalities and concepts of poverty. Some developing countries’ remarkable struggle to overcome underdevelopment also matters: effective appliance of aid, small micro financed projects or foreign investment recipients that succeeded – some were already tested and would make a difference to those in need –, improvements in educational systems and school attendance, and eradicating corruption from governments and institutions. Equality in distribution of wealth is also an area of improvement for developed countries: the gap is high and increasing.

Knowledge used to be historically transferred from developed countries to developing countries. However, in the light of some growth stagnation in many developed countries versus increasing growth rates developing countries, and given some known successful examples of overcoming poverty in the developing world, either in effectiveness of policies or in positive mentality, there must certainly be something to be learnt the other way round.

FRANCISCO MIGUEL BARRETO SIMÕES

The influence of education and family background on child poverty in Germany

“It is disappointing that Germany is not able to significantly improve the material conditions of life for children.”

Christian Schneider, UNICEF Executive Director in Germany 

Although Germany is one of the richest countries in the world, approximately 10 Percent of German boys and girls live in poverty which corresponds to 2.1 million children under the age of 16, as confirmed by a report of the United Nations Children’s Fund (UNICEF). The report approaches child poverty from two perspectives, child deprivation and relative child poverty.

Comparing Data on child deprivation rates of 29 countries, (23 out of 29 members of the OECD), Germany ranks on place 15.  The Figure shows the percentage of children under the age of 16 who are deprived of two or more items of a 14-items list, because the households which they live in cannot afford them. Taking into account aspects such as fresh fruit and vegetables every day, outdoor leisure equipment (bicycle etc.) and money to participate in school trips, it can be metered that 8.8 Percent of children in Germany are classified as being poor according to the child deprivation measure.

 

When looking at the measurement of relative child poverty, defined as households that live with less than 50 Percent of the national median of disposable income (after adjustment of family size), 8.5 Percent of children in Germany are being classified as poor, positioning the country on rank 13 out of 35 advanced countries.

According to a study carried out by the Institute for Labor Market and Professional Research (IAB), state policies and government programs fail to provide these children an equal start in life, the consequence being that large percentages of them cannot take part in normal childhood activities. Critiques say that Government support for poor families is not oriented towards the needs of children and oftentimes not taking them into account at all, even though the child poverty rate is one of the most important indicators of a society’s prosperity.

A study of the Joseph Rowntree Foundation on the costs of child poverty for individuals and society illustrates evidence on the impacts of poverty for individuals growing up in industrialized OECD countries. It explores the short, medium and long term consequences of child poverty relating to health, education, employment, behavior, finance, relationships and subjective well-being for individuals, families, and the economy. A long list of social risks such as impaired cognitive development, increased behavioral difficulties, underachievement in school, lowered skills and aspirations and higher risks of welfare dependency, can among others be linked to child poverty.

In Germany, especially the educational sector poses a challenge compared to other European countries, because educational success, and subsequently income, highly depend on the educational level of parents.

Using duration models it can be seen that particularly children of single parents, whose number increased significantly, (1996, one in seven families with children had only one parent, by 2009, the figure was almost one in five) are facing a difficult situation. The majority of these children grow up with their mother, who is, even though in many cases working full or part-time, due to low wages not able to pay for their children to participate in normal childhood activities such as sports or cultural programs. Due to their employment they often lack the time to assist their children with homework but simultaneously can not afford to pay a tutor, a matter of course in affluent families in case of academic difficulties. Unsurprisingly, according to the researchers, children from single-parent families by the age of 10 lack on average about half a year behind in natural sciences.

Concluding, it can be stated that family background is one of the most important factors of academic success of children. That way, children from lower income households often have lower aspirations and a higher probability of needing special assistance along the way. At the same time, it is more difficult for them to access this very assistance like pre-school education or tutoring. On top, educational disadvantage is likely to be passed on to the next generation, depicting a poverty trap that results in a lower skilled work force, low educational fulfillment and limited aspirations. Ultimately this development reduces skills and productivity and directly influences the economic growth and competitive ability of the society/economy as poverty besides lessening educational achievement also induces lower levels of health, increases the likelihood of unemployment and welfare dependence, and raises higher costs of judicial and social protection systems. Therefor the failure of fighting child poverty is one of the costliest mistakes a society can make.

Mirjam Mertel, 2923

United States of America – Economy, Poverty and Elections

An important Irish philosopher, Edmund Burk, told us the following: “Those who don’t know history are doomed to repeat it.”. In fact, this quote transmits the essential idea that is present throughout the article.
The US is the country in the OECD with the highest inequality level and poverty rate. In 2009 the highest ever level of poverty in 15 years was registered. The new generation, the so called the millennials, suffer high poverty rates as well: 1 in 5 millennials lives in poverty, according to a recent report released by the US Census Bureau. An additional statistic of interest comes on behalf of the United Nations Children’s Fund, stating that the US ranks 34th in a total of 35 countries analyzed.
As it is clear from the graph below, from 1959 to 2014, the only significant decrease of poverty levels was registered in the 60’s; entering a period of stagnation afterwards.

It is very difficult to point out all the reasons that cause an increase of the poverty rate. However, it seems to be consensual amongst economists that higher levels of inequality and lower income growth negatively impact poverty levels. According to the Economic Policy Institute, this is true for the US as we can confirm in the chart below. The bars show by how much the poverty rate increased or decreased due to rising income inequality, income growth across the income distribution, and changes in the educational levels, family structures, and racial composition of the US population. This is illustrated by the chart below, that allows us to compare the different contributions of different categories to the change in poverty rate.

These factors beg the question of whether we are tackling income inequality issues in the US and if income inequality is in fact being reduced. Unfortunately, a negative answer will follow. As we can observe in the graphs below from Larry Bartels’ “Unequal Democracy” book, the US is becoming a state with a tremendous inequality distribution of income between social classes.

The 95th percentile of real income growth is increasing at an incredible pace, on the other hand, we have the poorest part of the population with incomparable lower values.
These facts are so powerful and significant that it is our obligation to make some effort to understand the reasons behind this trend. Which measures were applied to increase the income inequality levels? And what about the income growth rates?
The important point here is to understand both sides of the coin. On the one hand, we have the democratic party supporting welfare measures such as food stamps or a strong role of the state in social security, with proven results. On the other hand, the republican establishment, argues in support for a smaller government, for flat taxes and even for trickle-down economics, as they defend that through these measures the gains in efficiency will generate positive spillovers for the rest of society, by the creation of jobs and of an economy with greater investment attractiveness.
The graph below is representative of the difference between democrats and republicans in power:

When the democrats are in power, the income growth is always greater, independently of the percentile considered. Similarly, democratic presidency is associated with a level of inequality that is incomparably lower.
Another interesting exercise is to divide the first graph into periods. Actually, if we do that, we are able to take conclusions regarding which party is responsible to an increase or a decrease of poverty rates.

Given the context of the current presidential election, it becomes essential, now more than ever to shed light on the performance of the two political parties in regards to poverty. The focus of the current political debate, or at least the media’s focus, is easily accused of being centered on style over substance. This is why we also need to “tell it like it is”, in regards to poverty since all this information may very well be fundamental for an undecided voter’s decision, it may even be a candidate’s trump card to victory (pun intended).

Finally, we should underline that the evident trends displayed undoubtedly favor the Democratic Party over the Republican, and it is this empirical evidence that constitutes the foundation of my positioning in the political spectrum. It is nevertheless essential to note how all the evidence that was presented does not provide any causal relation. We cannot draw definitive conclusions without considering all the factors that may have influenced how both parties tackled poverty throughout the years.

Gustavo Monteiro #800

 

 

Savings: a privilege of the rich? – The case of Portugal

Low income individuals who are not able to save are some of the most vulnerable people in our society and will be more likely affected by crisis, economic downturns or even bad luck (a disease, for example), representing a public policy issue for official authorities. This recent article by Diário de Notícias discusses how the rich save more than the poor. They say, according to the Bank of Portugal, individuals in the top 20% of the income distribution are responsible for 80% of total household savings in Portugal. Additionally, often times the poorest individuals even have negative saving rates and more educated individuals save more than the less educated ones.

Moreover, I illustrate this important debate with data on individuals’ saving rate across the income distribution in Portugal, using the latest Portuguese household budget survey, collected by INE in 2010/2011. This is an extensive and representative sample, gathering more than 9489 households, and ensuring a high external validity.

Source: INE | Portuguese Household Budget Survey (2010-2011)

According to this data, the average saving rate in Portugal is about 7.7%, although many individuals have negative savings, showing how indebtedness is a part of many people’s lives.

When we look at the different Portuguese regions (at NUTS II level), it is possible to observe substantial differences.

Source: INE | Portuguese Household Budget Survey (2010-2011)

The North has the lowest average saving rate (0.9%), while Azores has the highest (22%). Lisbon area, the biggest metropolitan area in the country, has an average of 6.9%. Both regions including the two biggest Portuguese cities (Lisbon and Oporto) have saving rates lower than the national average.

Controlling for the bottom 10% and top 10% of the income distribution, it is possible to observe differences in the saving rate of both groups.

Source: INE | Portuguese Household Budget Survey (2010-2011)

Source: INE | Portuguese Household Budget Survey (2010-2011)

For the most regions, the bottom 10% show a negative saving rate. The two worse situations are in the regions including the two biggest urban areas, as the North has an average of  -18.2% while the Lisbon area has an average of -26.9%. The national average for the bottom 10% is -12.1%. Looking at the top 10% individuals, in all regions the average saving rate is above the national average of 7.7% for all individuals, achieving 24.8%.

When it comes to relative expenditure in healthcare, the lowest 10% individuals spend on average a much higher share of their income (12.4%) than the top 10% (who spend 6.1%). Expenditure with food represents 17.6% of bottom 10% individuals total income, on average, while for the top 10% it only represents 11.2%. Also, the top 10% individuals seem to account for 71% of total savings in Portuguese households.

By decomposing the saving rate among individuals with different labor conditions, unemployed people have, on average, a negative saving rate, when compared to the employed and retired people.

Source: INE | Portuguese Household Budget Survey (2010-2011)

Observing the saving rate of households who receive Rendimento Social de Inserção (RSI), they seem to be financially vulnerable, as for almost every region the average saving rate is negative.

Source: INE | Portuguese Household Budget Survey (2010-2011)

The saving rate indicator was built from households’ total income and expenditures on an annual basis. It’s important to understand that for some time periods throughout the year some households may experience negative saving rates, although the annual average might be positive.

Concluding, it’s not my objective to speculate about the causes of these differences between the richest and the poorer. I only intended to show a clear picture of how the saving rate between the riches and poorer people are substantially different . These observations are also related with the findings of Thomas Piketty on how the rate of wealth accumulation is higher for the top income individuals. Applying this idea to the saving rate, the individuals who are more able to save will also have the capacity to invest more and accumulate higher returns in the future. In opposition, individuals less able to save could get into a “trap”, leading to negligible  amounts, or even get worse, if they spend more than their income. Finally, beneficiaries of RSI seem to continue spending more than their income. I hypothesise that the subsidy (together with unemployment benefits or low salaries) are not enough to cover basic needs or, in alternative, these beneficiares could have a lack of financial literacy. Moreover, it could be an interesting policy to provide education on personal finance to the beneficiaries of government transfers who are in risk of poverty or getting indebted. Also, it would be interesting to understand if lower income individuals get more indebted and what are the loan conditions they get with financial institutions.

By Henrique Pita Barros – Master in Economics & Nova Economics Club member (Poverty: Concepts and Challenges course)

(Analyses made on Stata software package)

Monetary and multidimensional measurement of poverty as a determinant of the success or failure of programmes against Poverty. Peruvian case.

The identification of the groups that are going to benefit from the social programs and policies against poverty are really hard to determine. In fact, the process of identification and targeting are decisive to the success or failure of a social program or policy, especially in countries with high level of poverty as Peru.

The crucial variable to determine if someone belong to the target is their poverty situation. Peru uses the common way to measure poverty: monetary.  The Peruvian National Institute of Statistics (INEI) considered monetary poverty to the people in which households the amount of money spend per person is insufficient to get a basic basket of food and no food (living place, education, health, transport, etc.). Extreme poverty refers to the people in which households the amount of money spend per person is insufficient to get a basic basket of food.

For 2015, 21,77% of the population of Peru (6 millions 782 thousand people) were in monetary poverty.  And for the same year the value of the poverty line was of s/. 315 (95.45$ with a exchange rate of 3.3) (Source:INEI).That would be the amount of money a person need in Peru to satisfied their alimentary and no alimentary needs. In this case, poverty is defined by one-dimensional measures,  the money spend in a month. But no one indicator alone can capture the multiple aspects that constitute poverty.  

Multidimensional poverty is made up of several factors that constitute poor people’s experience of deprivation, such as poor health, lack of education, inadequate living standard, lack of income, disempowerment, poor quality of work and threat from violence. More than the monetary measurement It can incorporate a range of indicators to capture the complexity of poverty. (Source : Oxford).

For the case of Peru, the multinational perspective shows a higher level of poverty that the monetary perspective. According to Enrique Vásquez, economic professor at Universidad del Pacífico in Lima, Peru, in a paper about programmes and policies against poverty, this situation allows to show a big problem for social programs and policies: undercoverage and leaks.  The undercoverage means that the programs are not enough for the people that actually need them. The leaks refers that people that benefits from the programs but are not part of the target.

In conclusion, the monetary measurement of poverty can miss a lot of relevant data important for a decisions  making process. A multidimensional measurement can provide a better framework for a better implementation of programmes and policies against poverty. The more policy-relevant information there is available on poverty, the better-equipped policy makers will be to reduce it.

Natalia Alvarez Espinoza

Monetary and multidimensional measurement of poverty as a determinant of the success or failure of programmes against Poverty. Peruvian case.

The identification of the groups that are going to benefit from the social programs and policies against poverty are really hard to determine. In fact, the process of identification and targeting are decisive to the success or failure of a social program or policy, especially in countries with high level of poverty as Peru.

The crucial variable to determine if someone belong to the target is their poverty situation. Peru uses the common way to measure poverty: monetary.  The Peruvian National Institute of Statistics (INEI) considered monetary poverty to the people in which households the amount of money spend per person is insufficient to get a basic basket of food and no food (living place, education, health, transport, etc.). Extreme poverty refers to the people in which households the amount of money spend per person is insufficient to get a basic basket of food.

For 2015, 21,77% of the population of Peru (6 millions 782 thousand people) were in monetary poverty.  And for the same year the value of the poverty line was of s/. 315 (95.45$ with a exchange rate of 3.3) (Source:INEI).That would be the amount of money a person need in Peru to satisfied their alimentary and no alimentary needs. In this case, poverty is defined by one-dimensional measures,  the money spend in a month. But no one indicator alone can capture the multiple aspects that constitute poverty.  

Multidimensional poverty is made up of several factors that constitute poor people’s experience of deprivation, such as poor health, lack of education, inadequate living standard, lack of income, disempowerment, poor quality of work and threat from violence. More than the monetary measurement It can incorporate a range of indicators to capture the complexity of poverty. (Source : Oxford).

For the case of Peru, the multinational perspective shows a higher level of poverty that the monetary perspective. According to Enrique Vásquez, economic professor at Universidad del Pacífico in Lima, Peru, in a paper about programmes and policies against poverty, this situation allows to show a big problem for social programs and policies: undercoverage and leaks.  The undercoverage means that the programs are not enough for the people that actually need them. The leaks refers that people that benefits from the programs but are not part of the target.

In conclusion, the monetary measurement of poverty can miss a lot of relevant data important for a decisions  making process. A multidimensional measurement can provide a better framework for a better implementation of programmes and policies against poverty. The more policy-relevant information there is available on poverty, the better-equipped policy makers will be to reduce it. 

Natalia Alvarez Espinoza

The desire of going back to the 70’s – Basic Income in Canada

In 2013, one in seven people in Canada lived in poverty (average gap between the poverty line and actual poor household income is 33%). A deeper analysis reveals a high child poverty rate (19%, despite it being a priority of policies) and single parent families being largely affected. Additionally, poverty is more pervasive in indigenous communities and immigrants/refugees and neighbourhood effects exist. More people have been resorting to food banks. Duration of poverty
spells is of almost
two years, with 23% of people exiting to near poverty.

Consequently, criticism of the social welfare system arose (an example of inadequacy of policies are minimum wages, which were found not to have a statistically significant effect on poverty, although that was the main rationale for its introduction).

Due to technological developments and changing labour force (higher time people take to find a stable job; abundance of short-term contracts), institutions are under pressure to rethink social programs. Hence, precarious work, low wages along with elimination of jobs by technological advances and an uncertain economy boosted the discussion around a minimum guarantee income. Other drivers are demographic pressures on the health-care system and OECD’s research, which states that increasing income for the bottom 40% of the income distribution can decrease income inequality, impacting positively on economic growth. In Canada, the social system is perceived as not protecting the working poor, paving the way for increased support from the public to basic income and a recommendation that the federal government studies it.

This follows the increasing momentum of the idea, especially in Europe, with Switzerland having a referendum, Finland planning to set a pilot program and pressure on Italy to introduce it.

An experiment on basic income happened between 1974 and 1979 in Dauphin, Manitoba, in which cheques were delivered to poor people. This program, “Mincome”, had the objective of checking whether giving money to people would reduce their motivation to work. During this period, one thousand families that were below the poverty line started earning a liveable income. Basically, they were given 60% of the low income cut-off determined by Statistics Canada and 50 cents were deducted from every dollar people got from other income sources. This experiment ended when the government changed, without a final report having been drafted. Nevertheless, recent research was able to discover some of its effects. Taking part in the program led to an increase in food security and on the ability to pay expenses. Although there was a slight reduction in the workforce, it happened mainly in the demographic groups of high school student and young mothers – teenagers were able to focus on studying instead of working (increased likelihood of finishing high school, since people could now afford further education) and women could stay longer at home with new-borns. For some people, the possibility of pursuing more stable and suitable jobs emerged. Therefore, people continued to work. This goes against opponents of the program who claimed people would stop working, relying on government given income. On health, rates of hospitalization decreased (for accidents, domestic violence and injuries), mental health of participants improved and hospital visits declined by 8.5%. Summing up, Mincome allowed people to be above the poverty line, easing economic anxiety and letting them make long-term plans.

This program inspired the recently announced basic income pilot in Ontario, which aims at testing its efficiency in giving income support and its impacts on labour supply, health-care and overall benefits. Other governments also showed interest in the idea. It will replace several benefits into one cheque given to people on welfare and those that have a low paid job (the exact details are not defined yet). Proponents claim the program is more efficient, yields lower costs than having a series of social programs (would streamline government bureaucracies), could reduce health-care costs (as poor people are usually less health) and eliminate poverty. Critics state the hardship of implementation in Canada, not being able to solve discrimination and inequality (won’t impact on relative poverty), giving incentives for employers not to create well-paid and secure jobs, reduction of labor supply (results now could be different from those of 40 years ago) and the potential cost of the program (possible need to raise takes to finance it, leading some to be worse off). Nevertheless, there is consensus on the need to develop a new approach that would prevent poverty and lift people out of it.

Ana Margarida Carvalho (795)