Economic Development: Looking Beyond GDP Growth

Senator Robert F. Kennedy eloquently summarized the shortfall of measuring success of a nation solely on the level of GDP per capita:

“Yet the gross national product does not allow for the health of our children, the quality of their education or the joy of their play.  It does not include the beauty of our poetry or the strength of our marriages, the intelligence of our public debate or the integrity of our public officials. 

It measures neither our wit nor our courage, neither our wisdom nor our learning, neither our compassion nor our devotion to our country, it measures everything in short, except that which makes life worthwhile. 

And it can tell us everything about America except why we are proud that we are Americans.” – Senator Robert F. Kennedy (March 18, 1968)

In a way he was correct, a lot of us are quick to measure the success of a nation based solely on GDP per capita, or income per person. Yet, income is not the sole predictor of well-being. For example, income per person of India is much higher than that of Bangladesh, almost twice as high. Yet, as Nobel-prize winner Amartya Sen notes:

"Our hope is that India's public policymakers will be embarrassed by the comparison with Bangladesh. On a range of development indicators such as life expectancy, child immunisation and child mortality, Bangladesh has pulled ahead of India despite being poorer.”

If income was the sole indicator of development, then increasing GDP of the nation would have automatically cured all the social ills, like lack of access to clean water, lack of sanitation, stunting of children, lack of quality education access, and many more. Sadly, we do not see that happening.


The governments should not only ensure that gross domestic product (GDP) grows annually, but it also should ensure that the well-being of the citizens of the nation are improving as well. There are many countries where average income per person is relatively high, but social indicators paint a picture showing the majority of the country’s social development is severely lacking (Equatorial Guinea, Gabon, India, Pakistan to name a few).

My Ph.D. Dissertation

Here is a link to my dissertation. Much to the chagrin of my family and friends, I opted for the electronic version only, and did not order a print version. But I am happy that I was able to publish two out of the three chapters of my dissertation.

My dissertation looked at the persistence of low income among individuals and regions, and investigated the causes behind it. 

Here is the abstract (copied from the link):

"My dissertation investigates the reasons behind the persistence of income among individuals and US counties. I look at the role of initial conditions in explaining current level of income. In my first essay, I look at how childhood neighborhood conditions affect income of a person. To study persistence, I model income as an autoregressive process where the coefficient on the lagged dependent variable heterogeneous across individuals. In my second essay, I derive a new way to measure chronic poverty, or long term poverty. Current measures of chronic poverty cannot be used to compare improvements of poverty rates over time. Using my measure, one can compare to see if chronic poverty rates changed over time. My third essay looks at the historical reasons behind differences in income between rich and poor counties in the US. There are about 250 counties in the US where poverty rates have been above 20 percent for the last 40 years. I look at whether current and past factors, or differences in technologies is the main reason behind persistence of high rates of poverty in these counties.

Overall, I find that childhood neighborhood conditions have a big effect in determining the coefficient on the lagged dependent variable, that is, childhood neighborhood conditions affect persistence of income. I find that improving neighborhood poverty rates by one percentage point and father’s education by one year bring the greatest improvement of social welfare. In my second essay, I show the importance of measuring chronic poverty separately from total poverty; for example, between 2000 and 2005, total poverty declined, but chronic poverty rates actually increased, which shows that the long-term poor got worse off during that time period. In my last essay, I find that some US counties remained poor mainly because of differences in factor endowment, and past and present levels of human capital explain most of the differences in current level of income between poor and non-poor counties. Differences in factor endowments explained 80 percent of income between poor and non-poor counties, while technology accounted for only 20 percent of the difference."

Here is the link to my dissertation: http://uknowledge.uky.edu/economics_etds/8/

Explaining Persistent Poverty in Certain Regions in the US

A recent paper I wrote (published in the Southern Economic Journal) with Jim Ziliak and Jenny Minier of the University of Kentucky investigates the underlying causes of persistent poverty in certain regions of the US. The following map of the US shows the counties with poverty rate of over 20 percent from 1959-1999 (using the official definition of poverty in the US):

The counties are not scattered around the US; instead they are located in five specific regions of the US: the central Appalachian region, the Black Belt region, the Mississippi Delta, the Texas colonias and the counties with Native American reservations in the western parts of the US. In this paper, we looked at why these regions have seen such high levels of persistent poverty for such long periods of time. 


We find that most of the differences in income between the poor and non-poor counties is due to lower levels of factors of production in the poor counties. However, the more important result we find is the importance of human capital in explaining persistent poverty. Current level of human capital (proxied by the proportion of people over 25 years of age with a high-school education or higher), along with past levels of human capital (proxied by the proportion of adults who cannot read or write in 1900) explain 60 percent of the differences in average income between the persistently-poor and non-poor counties. Thus, promoting education in the persistently-poor counties could help to reduce some of the large income gap we see between the persistently poor and non-poor counties.

Multidimensional Poverty Index of Alkire and Foster (2011)

Economists, development workers and policy makers all agree that poverty is multi-dimensional in nature. Just improving one dimension, such as income, may not improve the overall well-being of the person. For example, let an individual earn $20,000 a year, and the poverty line is $15,000. This person is not considered poor under any definition. However, if the person has a debilitating illness and medicines cost $7,000 a year, then this person’s effective income now is $13,000 – which is lower than the poverty line. Although the person earns more than the poverty line, their consumption bundle is similar to that of someone in poverty.

Therefore, there is a need to measure different dimensions of well-being, and not just income, to determine the poverty status of a person. Consequently, multi-dimensional poverty indices have been developed, and one of the more popular one is the Alkire and Foster (2011)Multidimensional Poverty Index (MPI). The Oxford Poverty and Human DevelopmentInitiative (OPHI) has been applying this index to measure MPI poverty in different countries, and the UNDP has also adopted this index in its HumanDevelopment Report.

To see how MPI is calculated, lets look at an example. Let there be 5 individuals and 3 dimensions of well-being – income, health and housing. The data is arranged in matrix form:

The rows are for each individual, and first column is income, the second column is health status, and the third column is housing status. If health and housing status is 1, then the person is deprived in that dimension (poor health/poor housing). So the third person has an income of 300, good health (0) and poor housing (1). Let the income poverty line be 350. Then persons 1, 2 and 3 have incomes less than the poverty line. Thus, persons 1, 2 and 3 are deprived (given an indicator of 1) and the rest get a 0, and the above matrix becomes:

The next step in Alkire and Foster (2011) is counting how many people are deprived in k dimensions, where k is less than or equal to 3. From the data above, we see that 1 person is deprived in all three dimensions; 3 are deprived in 2 or more dimensions and 4 are deprived in 1 or more dimensions. 

Thus, the multidimensional headcount poverty measure is:

 1/5 * 100= 20% for k=3. So 20 percent of the population is deprived in all 3 dimensions

3/5 * 100=40% for k>=2. So 60 percent of the population is deprived in 2 or more dimensions

4/5 * 100=80% for k>=1. So 80 percent of the population is deprived in 1 or more dimensions

Notice that even the person who earns 500 can be MPI poor, even though unidimensional poverty measure (just using income to determine the poverty status of a person) may not consider that person to be poor. 

The average deprivation for person 1 is 1, for person 2 is 1/3, person 3 is 2/3, person 4 is 0 and person 5 is 2/3. The M0 equals headcount times the average deprivation of the people who are multidimensionally poor. The M0 measure thus is: 

1/5 * 1/1(3/3) = 1/5 if we consider the cutoff value k=3
3/5 * 1/3(3/3 + 2/3 + 2/3) = 1/3 if we consider the cutoff value k>=2
4/5 * 1/4(3/3 + 1/3 + 2/3 + 2/3) = 8/15 if we consider the cutoff value k>=1

I have also used a version of the MPI to show how it can be used to assess the effectiveness of an anti-poverty program that can have multiple outcomes. The link to the paper is here.

The Foster, Greer and Thorbecke (1984) Family of Poverty Measure

Once a poverty line has been set, the poverty status of a person is determined by comparing their income with the poverty line. If the person earns less than the poverty line, then that person is considered to be poor. This type of poverty measure is called a unidimensional poverty measure, because they use one dimension of well being (income in most cases) to assess the poverty level of a person. A mathematical function is used to aggregate poverty. One of the most popular mathematical function used to measure poverty is the Foster, Greer and Thorbecke (1984) family of poverty measures (a modified version is presented below): 

Each individual is denoted by i, and there is a total of n individuals. z is the poverty line, and xi is the income of person i. The function I(xi <=z) is an indicator function, which is equal to 1 if income of person i is less than the poverty line, and zero otherwise. α is a number equaling 0, 1, 2.... 

As an example, consider this. Lets say there are 5 individuals (so n=5), and each person has the following income: 


Person 1: 100
Person 2: 200
Person 3: 300
Person 4: 400
Person 5: 500

Let the poverty line, z, equals to 250. 

When α=0, then the first part of the equation, which is:

becomes equal to 1, because anything raised to the power of 0 equals to 1. So, the indicator function remains, and it equals to 1 for persons 1 and 2, and 0 for persons 3, 4 and 5. So, the poverty measure when α=0 is 2/5 or 40 percent. This measure is also called the 'headcount' measure, and it measures the proportion of individuals who earn below the poverty line. 

However, the headcount measure does not measure the depth of poverty. Person 1 is clearly worse off than person 2, but the headcount measure does not differentiate that. This issue can be circumvented when α=1. The equation that's after the summation sign: 

thus becomes

 Since I(300<=250), I(400<=250) and I(500<=250) all equal to zero, the equation simplifies to:

Thus, when α=1, the poverty measure is (0.6+0.2)/5 = 0.16. This is called the poverty gap measure. It measures the average shortfall of income of the poor from the poverty line. 


When α=2, the measure is called a squared poverty gap, and this measure puts more weight on the poorer individuals when compared to those who are poor, but closer to the poverty line. When α=3, it puts more weight on the poor individuals, and so forth. 

This FGT (1984) measure is widely used to assess the poverty rate of nations across the world. 

Evaluating the Poverty Line of Bangladesh

A revised version of this post has been published in the newspaper "Dhaka Tribune" on May 28, 2015

Recently in October of 2014, the World Bank released the “Bangladesh Development Update,”  where it was stated that the national poverty rate of Bangladesh fell from 31.5% in 2010 to 24.47% in 2014. Using the population estimates from the World Bank and Bangladesh Bureau of Statistics, this shows that the total number of poor fell from 47.6 million to 38.5 million between 2010 and 2014. This seems to be a remarkable achievement, as the number who are considered poor fell by almost 10 million within the past 4 years, thus showing that the anti-poverty and inclusive growth targets of the government are being met. However, on closer inspection, it is evident that the bar to identify who is poor has been set too low, and the standard used to determine the poverty status of a person does not fully reflect the well-being of the general population of Bangladesh. Cost of living in urban areas of Bangladesh are very high, and even after earning well above the poverty line, the urban-poor families tend to struggle financially, as this article will show.

The “Bangladesh Development Update” notes that the national poverty line has been set by the government to be US$1.13 per person per day, which comes to about 87.38 taka per person per day at current exchange rate. Anyone living on less than this amount per day is considered to be poor. One thing to note is that the national poverty line of Bangladesh is lower than the $1.25 poverty line that donor organizations now use to measure extreme poverty across the world.By casual observation, this 87.38 taka per person per day seems to be too low of a number to lead a decent standard of living. Indeed, the Asian Development Bank argued in a recent report (“Key Indicators for Asiaand the Pacific, 2014”) that the poverty line should be much higher than $1.25 per person per day for Asian countries. According to ADB’s estimate, with a revised poverty line of $1.51 per person per day, 58 percent of Bangladeshis (or 86 million) were in poverty in 2010. Raising the poverty line from by just 38 cents or about 30 taka increases the number of poor by almost 40 million. About 40 million Bangladeshis earn between $1.13 and $1.51 per day, but this amount seems low to maintain a decent standard of living in Bangladesh, once one takes into account the cost of living in Bangladesh.

According to the World Bank, the Bangladeshi poverty line is calculated by estimating and then adding two costs – one is the cost of purchasing 2,122 kcal of food, and the second includes the cost of purchasing a bundle of certain necessities needed in daily life. However, this line does not include cost of rent, transporation and educational expense that are also faced by the poor. Consequently, the current poverty line of Bangladesh underestimates the number of poor, because the poverty line is not adjusted for the cost of living in the country.  Proper adjustment of the poverty line is absolutely necessary because it is one of the criteria used to gauge whether inclusive development is being implemented by the government. If the threshold is set too low, without any reference about the cost of living of a country, then the true impact of inclusive development cannot be ascertained. With a low poverty line, it would seem that poverty is decreasing in the country; however, there can be a large group of people who are struggling to make ends meet because of high cost of rent, utilities, and transporation, even though they may earn well above the poverty line. These people who are should be considered to be in poverty too, and development goals should have provisions to help these individuals.  

Does Bangldesh need to update its national poverty line to reflect a better assessment of who is poor? I believe it is time to do so. To understand why, lets consider a thought exercise. For a family of 4, the minimum amount needed to keep the family out of poverty is 87.38 x 4 = 349.52 taka per day, according to the official measure. This amount comes to about 10,485 taka per month. Thus, if the family earns 11,000 taka a month (husband, wife and maybe the two children too), the family is considered to be living above the poverty line.

But how much is actually needed to have a decent standard of living in, lets say Dhaka for this family of 4? A recent report on the newspaper Dhaka Tribune (February 10, 2014 titled “Slum Dwellers pay more but get much less”). states that rent in a slum in Dhaka averages between 1,500-3,500 taka per month for a single room, with electricity bill being 500 taka and water bill being 200 taka. Price of housing in the district towns might be slightly lower, not by much. On top of that, another news article mentions that price of IRRI rice is 33-35 taka per kg in Dhaka (September 6, 2014, titled “Rice dearer in capital” from bdnews24.com),  lentils cost 95 taka per kg, eggs cost 35 taka per 4 piece, and onion cost 45 taka per kg (August 15, 2014 titled “Prices of onions, egg up” from bdnews24.com). Therefore, this family of 4 can be paying 4,000 taka a month on rent and utilities (living in a slum) and 3,000-4,000 taka on food, and so very little is leftover for ‘luxuries’ like transportation, clothing expenses, education expenses for the children, entertainment and spending on accessories such as soap, shampoo and detergent. A family may be able to get-by by earning slightly above the poverty line, but that lifestyle will not have many of the things that we should take for granted, take for granted, like decent living and nutritious food.

Even if the total monthly income of the family is above the poverty line, the family still faces a lot of economic hardship, and does not even attain the minimum of the decent standard of living. Thus, we see millions migrating out of the country, or families scattered between cities and villages because it is too expensive for the whole family to live in one place. This article is not saying that the government is not reducing poverty, rather, it is advocating for a revised poverty line that reflects the actual needs and the cost of living of a typical family in the rural and urban parts of Bangladesh.

What steps can be taken to revise the poverty line? A large portion of a family’s budget goes towards expenses such as rent, transportation and utilities in urban areas, and so the revised poverty line should account for the amount needed for a person to meet the minimum level of housing, utilities and transportation both in rural and urban areas, in addition to food expenditures. The Household Income and Expenditure Survey of Bangladesh conducted by the Bangladesh Bureau of Statistics gives a good picture of how much families in Bangladesh spend on food, clothing, housing, education, utilities, transportation, etc. Using those numbers, the government can get an understanding what kind of goods a typical Bangladeshi family spends money on, and what is the minimum amount needed to maintain a decent standard of living in Bangladesh. 

Pictures of Poverty

Sometimes, a pictures says more than numbers or words. Saying that 20 percent of the population lives in poverty does not depict the hardships those in poverty face.

The Daily Mail newspaper has taken some photographs of people living in one of the poorest counties in the US.

The Modern-Day Poverty in Kentucky

Here is another link showing faces of poverty in the US.

Such poverty exists in the US. We don't notice it, but the poor exist in every community. Here is a video of children going hungry in Iowa, a major food producer in the US, if not the world.

The situation in poorer countries is even worse. Here are some pictures of the marginalized poor in Bangladesh. These people have very little, if any, social safety nets to rely on.

Poverty numbers tell us whether the poor are getting better-off or worse-off, but they do not portray the human side of the story. These photographs and videos do, and it should always be remembered that when helping the poor, people should treat them with the dignity and respect of a human being.

How do we Measure Poverty?

We hear statements like "45 million Americans are Poor;" yet we should think how we measure poverty in the US? Or in other parts of the world?

The Nobel-prize winning economist Amartya Sen mentions that there are two issues faced when measuring poverty - one is how to identify the poor, and the second is to use a mathematical function to measure the intensity of poverty (Sen, 1976). In order to identify who is poor, we use a metric called the 'poverty line' - anyone who earns/consumes an amount below that poverty line is said to be in poverty. There are two ways we come up with the poverty line:

1. The Absolute Measure: In this measure, we create a bundle of goods that is deemed to provide the minimum amount of standard of living, and then convert that to dollar amount, which is the poverty line. Anyone earning or consuming less than that dollar amount is said to live in poverty. One famous absolute measure of poverty is the $1/day (now $1.25/day). Anyone earning less than $1.25 a day in the developing world is said to be living in extreme poverty. About 1.2 billion people earn below this level in 2013. Another common way of measuring poverty in developing countries is to measure the cost of purchasing 2200 calories of food per person. That cost is the poverty line, and anyone earning less than that is said to be in poverty.

2. The Relative Measure: This sets the poverty line based on the standard of living in a certain area. For example, in the EU, poverty line is set to be 60 percent of the median of national income. So, if median income is 60,000 Euros, then the poverty line is 36,000 Euros, and anyone earning less than that is said to be in poverty.

The United States uses the absolute measure to set the poverty line. Mollie Orshansky came up with the current method the US uses to measure poverty. Orshansky found out that in the 1960s, a typical family spent one-third of their income on food. Following this rule, if one calculates the minimum amount needed to purchase a fixed basket of food for a family, and then multiply that number by 3, then one can arrive at the minimum amount needed to sustain a family in the US. Since the 1960s, the US has been using this method to calculate the poverty line.

This poverty line is sensitive to the size of a family. In 2015, the poverty line for a family of 4 is about $24,000. So, a family of 4 that earns less thank $24,000 a year is considered to be poor. Under this definition, about 45 million Americans are living in poverty.

An advantage of the absolute measure is that the poverty rate can be compared from one year to the next, since we are using the same metric to measure poverty. However, a drawback of the absolute poverty measure of the US is that it does not adjust for regional price differences. So, a family of 4 in New York City earning $25,000 a year is not considered poor, but a family of 4 earning $24,000 in Mississippi is; although cost of living is much more expensive in New York than in Mississippi (housing, food and clothing are much more expensive in New York than in Mississippi). Another criticism of the US poverty line is that food expenditure is no longer one-third of one family's income, so a new definition is needed to calculate the poverty line.

Now after establishing the poverty line, the proportion of people earning less than the poverty line is the poverty rate of a country or the headcount ratio. In 2013, the poverty rate in the US is 14.5%.

Poverty and the Deprivation of Dignity

We always think about poverty as an absence of material goods. Or, the inability to purchase material goods. However, we seldom think poverty that can lead to a loss of dignity. Adam Smith noted this in his book the "Wealth of Nations" (1776):

“A linen shirt … is, strictly speaking, not a necessary of life.The Greeks and Romans lived, I suppose, very comfortably though they had no linen. But in the present times, through the greater part of Europe, a creditable day-labourer would be ashamed to appear in public without a linen shirt, the want of which would be supposed to denote that disgraceful degree of poverty which, it is presumed, nobody can well fall into without extreme bad conduct.”

If a person in the late 1700s could not afford a linen shirt, they would be ashamed to come outside in public. The inability to purchase even the basic necessities can sap the dignity of a person. A recent article in the Washington Post highlights the plight of the poor:

"The Poor are Treated like Criminals Everywhere, even at the Grocery Store"

While we are transfixed on the idea that the poor are mis-using the welfare system, we seldom think the indignity that the poor have to go through to get access to those means-tested welfare. After getting them, they face even more indignity when they want to use that money for the reason why it was sanctioned in the first place. 

How can we help? Well, we first have to stop labeling the poor as people who take advantage of the welfare system. Nobody enjoys going to the welfare office to beg for money. We need to start seeing people as humans, not as freeloaders. 

Hello! Thank you very much for visiting my blog. I am an Assistant Professor of Economics at Elon University, Elon, North Carolina, USA. I received my B.A. degree in Economics and Business Administration at Transylvania University, Lexington, KY; my M.A. in Economics at Vanderbilt University, Nashville, TN; and my Ph.D. in Economics at the University of Kentucky. For more information, please visit my website.

My areas of expertise is on Labor Economics, Economic Development and the Economics of Poverty. I will be mainly writing about these two economic issues. Hope you will enjoy reading them! If you have any comments/suggestions, please feel free to email me @ tislam at elon dot edu.