Why did poverty fall?

Posted in development, economics by jrahman on March 10, 2013

Although violence seems to have subsided, things are far from normal in Bangladesh.  Family members of Awakening organisers or war crimes trial witnesses are being killed.  Hindus and other minorities remain terrified.  The prime minister is yet to address the nation.  On the other hand, violence has subsided, and with partisan finger pointing, some sense of normalcy is returning.

I could have titled this post after the Monty Python classic, because it is something completely unrelated to Shahbag, Jamaat-e-Islami or war crimes trial.  And it’s a ‘good news story’ post.

According to the government measure, about half the people (48.9% to be precise) were below the poverty line in 2000.  By 2010, less than a third (31.5%) were officially considered poor.  By World Bank’s estimates, the proportion of people living on less than $1.25 a day fell from 58.6% to 43.3% in that decade.  The share of people living on less than $2 a day also fell in  that period.  These are shown in the chart (data: World Bank World Development Indicators).


And a host of other indicators of human welfare suggest that the last decade saw unprecedented improvement in living standards.  Under governments of both the major party as well as a technocratic one, despite natural disasters and political upheavals including a de facto coup and jihadi violence, tens of millions of people escaped dire poverty.

That is an undeniable good news.

But what actually led to the decline in poverty? 

In answering that question, it is useful to understand poverty, as defined by the statisticians, is usually a consumption measure.  That is, a person is defined as poor if their consumption falls below a certain quantity.  We can think of four broad reasons behind increases in per capita consumption (and thus decline in poverty):

  • smaller households — less mouth to feed, more food per mouth;
  • higher non-labour income — subsidies, welfare payments, aid, remittance;
  • higher labour income;
  • more consumption from a given income — this one is tricky, see below. 

Any decline in poverty as a result of three of these factors is not likely to be sustained beyond a certain period.  Demographic change is a one-off matter — once you go from a seven kids to two or one, you can’t do that again.  Redistribution of income, or remittance, or foreign aid cannot be maintained indefinitely.  And you can’t indefinitely consume more than your income.

Sustainable decline in poverty, therefore, has to come from rise in labour income.  And according to the analysis by four World Bank economists, increase in labour income explains the decline in poverty in Bangladesh.  Specifically, of the 17 percentage point fall in the official poverty ratio (share of people living below the poverty line) during the 2000s, about half (8 percentage point) can be attributed to rising returns from farm — underscoring the importance of farm productivity.  Rising returns from non-farm assets contributed to another 3 percentage points.  Poverty also declined because people became more educated (nearly 1 percentage point) and people moved to better paid sectors and education (nearly 2 percentage points).

There may be more good news.  According to the authors, consumption-income ratio fell during the 2000s, which added to poverty.  While this may be true as a statistical matter, the underlying economics is actually quite positive.  A fall in consumption-income ratio is also a rise in savings.  What the numbers show is that people are saving more.  This doesn’t necessarily mean a good thing — if people save more because they are afraid of the future, or because there is no opportunity to spend their money, that’s clearly bad.  But people may also save more because they become more hopeful about the future.

My working hypothesis is that savings has risen because people have something to save from and something to save for.  If that hypothesis is correct, it is good news indeed.

*Inchauste G. Oivieri S, Saavedra J, Winkler H, (September 2012), What is behind the decline in poverty since 2000?  Evidence form Bangladesh, Peru and Thailand, Policy Research Working Paper 6199, World Bank.

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  1. ryanira2 said, on March 11, 2013 at 8:34 am

    Rural poverty is clearly in the wane. Anyone who has connections to the village economy knows that labor wage has increased dramatically over the last decade. In fact in many parts of the country there are shortages in the farm labor supply.

    I found you last post on farm productivity very intriguing. You showed that Bangladesh farm productivity (at least in the rice production) has been on par for a long time with the very best of East and South east Asia, the world’s rice bowl. I distinctly remember reading lot of negative comparison of Bangladesh agricultural sectors with SE Asian countries in the 90s. My lasting impression was that Bangladesh is definitely deep inside the efficiency frontier in agriculture and there is lot of room for easy catch up growth. But your statistics showed quite otherwise.

    If happened to have found any good read detailing the development of farm economy in Bangladesh in the last 10-15 years, would you please share it with us?

    • jrahman said, on March 13, 2013 at 7:56 am

      Sure, will do.

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