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Conceptual Challenges in Poverty and Inequality

by Ravi Kanbur

The last 30 years in the analysis of inequality and poverty has seen a phase of conceptual advancement (1970-mid 1980s) followed by a phase of application and policy debate (mid 1980s-now). Both phases were exciting and useful in their own way, but the applied phase has significantly exhausted the potential of the conceptual advances of two decades ago. There is now a need for a new phase of conceptual advances, which will make use of the shifting methodological terrain in mainstream economics, and answer emerging policy questions.

Three Decades of Poverty and Inequality Analysis

Notable works by Tony Atkinson and Amartya Sen in the 1970s sparked a huge discussion on how exactly to measure inequality and poverty. Relatedly, this was the period when interaction with the philosophical discourse of John Rawls and Robert Nozick enriched economists’ perspectives on distribution. Sen’s ‘capabilities’ approach has its origins in the debate on utilitarianism that was active in this period.

The 1970s and early 1980s were also a time when economists began to make the conceptual leaps necessary to bring processes of social interaction to the understanding of economic phenomena in general, and poverty and inequality in particular. By incorporating the issues of imperfect and asymmetric information within the rational choice framework, economists (notably, Joseph Stiglitz, George Akerlof and Michael Spence) analyzed such phenomena as the underclass in developed economies, or credit constraints and the lack of investment in education by the poorest of the poor in developing countries. It was argued that in the presence of imperfect and asymmetric information, the market economy can produce multiple equilibria, some more efficient and more equitable than others, and that public action was necessary to move from the ‘bad’ equilibria.

As a final example of the conceptual ferment on distributional issues in economics and development economics, gender and intra-household questions were put firmly on the agenda. In the 1970s and early 1980s it was brought home to economists that our ‘unitary’ models of the household simply could not capture or explain the evidence on deprivation among females in developing countries. While slow to get off the ground, this line of enquiry gradually blossomed conceptually and led on to applied and policy analysis.

My contention is that from the mid-1980s onwards the conceptual ferment on distributional issues died down and we went into an equally exciting phase of consolidation, application and policy debate. The new inequality and poverty indices were systematically applied to data sets in rich and poor countries. Indeed, for African countries this period was characterized by a great increase in household survey data sets. Similarly, the literature on intra-household and gender issues progressed to consolidation and application. There is of course still strong resistance from the profession’s basic reliance on the ‘unitary’ model. But the debate is now on the details of this or that empirical test, not on whether factors such as intra-household bargaining between the genders in principle have a role to play.

Graduate texts in development economics now use the imperfect information perspective to frame the discussion of underdevelopment. The interaction between economic and philosophical discourses has also ‘normalized’. All economists would now know exactly what was meant by the term ‘Rawlsian objective function’. However, it would be fair to say that ‘big ideas’ in philosophy do not seem to animate us in the same way as they did 20 or 30 years ago.

It is not that there has been no ferment on distributional issues in economics and in development economics in the last 15 to 20 years. But it has been not so much on the conceptual as on the policy front. In the wake of the oil price shocks of the 1970s, many developing countries in the 1980s adopted—or, depending on your point of view, were forced to adopt by a cartel of International Financial Institutions—programmes of ‘structural adjustment’. These programmes, primarily introduced in Latin America and in Africa, contained the key elements of the ‘Washington Consensus’ —including opening up economies to trade and capital flows and reducing the role the state in the economy. The fall of the Berlin Wall in 1989 ushered in ‘transition’ to market economies for countries of Central and Eastern Europe and the former Soviet Union. These economies also adopted, or were forced to adopt, similar policy packages. Finally, in the late 1990s the world was hit by a series of financial crises, which many laid at the door of these same policies, especially deregulation of financial markets and flows. All of the above have now perhaps been subsumed under a general (and generally unhelpful) catch-all heading of the debate on ‘globalization’.

The debates of the last 15 years in development economics have crystallized around the consequences of these policies and these developments for poverty and inequality. The conceptual advances of the first 15 years, particularly in the measurement of poverty and inequality, have of course been put to good use, especially as new data sets have become available. The debate has been fierce, with the term Washington Consensus acquiring the status of a term of abuse in some quarters. But it has hardly led to or involved strikingly new conceptual questions—at least not from the economic perspective. The economic questions that abound in these debates—Is economic growth good for the poor? Is trade openness equitable and efficient? What exchange rate regime leads to least unemployment?—important as they are, do not seem to call forth major conceptual advances in the core of economics any more than normal. Fiercely debated? Yes. Conceptual ferment? No.

Conceptual Challenges

Where will the new conceptual ferment come from? In what follows I tentatively suggest three candidates for topics or questions in the distributional area that may well spark the conceptual debates in the years to come—death and the measurement of poverty; behavioural economic foundations of poverty and inequality analysis; and dealing with the multidimensionality of poverty and the standard of living. Like all good questions these are not new. And clearly they are not the only conceptual questions we face. But in my view they are examples of questions that could trigger the conceptual advances and debates of the next decade or two.

Poverty and Death

As AIDS cuts its destructive swathe through Africa, its distributional profile seems to be changing. Increasingly, it is becoming clear that it afflicts the rural poor. Without getting into a debate on the epidemiology of the disease, I would only ask us to consider the possibility that the poor will die disproportionately from this disease in Africa in the decades to come. It would be a monstrous assault on our fundamental intuitions if these deaths were not recorded on the negative side of the ledger in any sort of social assessment. And yet the fact of the matter is that all of the commonly used poverty measures would decrease if the poorest person died as a result of poverty.

The issue raised here is conceptual. Current conceptualizations of poverty measurement focus (somewhat unthinkingly) on those currently alive, whereas death rates from AIDS will force us to consider the disproportionality of poor lives extinguished. Our conceptual tools do not seem to be adequate to the task. We will get considerable help from an earlier literature (which goes back to the 1970s and early 1980s) on utilitarianism and population ethics, but new tools will have to be developed to address these concerns.

Behavioural Economics, Development Economics and Distributional Economics

With the recent awards of the Nobel prize to Daniel Kahneman and Vernon Smith, the American Economic Association’s Clark Medal to Matthew Rabin, and the MacArthur ‘genius’ award to Sendhil Mullainathan, behavioural economics can truly be said to have gained professional recognition in economics.

Behavioural economics brings to economics the insights of psychology into how individuals actually behave. Interestingly, while the behavioural economists were toiling away to question the assumptions of basic rational choice theory, development economists and distributional economists, including myself, were embracing the central tenets of microeconomic analysis. Even the models and insights that flowed from the imperfect information paradigm of Akerlof and Stiglitz did not depart from the rational choice frame in any strong sense.

Those measuring poverty and inequality have, implicitly if not explicitly, taken a rational choice perspective. This is captured most vividly in the standard way of operationalizing well-being in empirical work—a simple sum of expenditures on consumption goods. There are some adjustments, to be sure, for public goods. But there are none for public bads, and certainly none for ‘private bads’, the very idea being incoherent in a rational choice perspective. Thus, for example, a ceteris paribus increase in alcohol expenditure would be counted as an increase in wellbeing despite any increase in domestic violence that it might lead to. Increased expenditure on addictive goods like cigarettes would count as an increase in well-being. If this increase happens for poor households, measured poverty would decline!

At the very least, the smoking example highlights a paradox— at the same time that the World Bank issues reports about the disastrous consequences of smoking among the poor in developing countries, its poverty measures must treat this increase as a contribution to reduction in poverty. But, at a deeper level, the example issues a conceptual challenge to development economists and distributional economists. We have had a good run into the bosom of mainstream economics by adopting its rational choice precepts. But the mainstream itself is being questioned by behavioural economics. What does this mean for the measurement of poverty, and for the analysis of anti-poverty policies?

How to Handle Multidimensionality of Poverty and Inequality?

The standard way economists think of and operationalize the standard of living is in terms of income (or monetary value of consumption). Measures of inequality and poverty are also thus primarily income based. In 1990 the late Mahbub ul Haq introduced the well known Human Development Index (HDI) which is a weighted sum of three components—income, literacy and life expectancy. The annual publication of the HDI is now an eagerly awaited event and invariably leads to debates within a country through comparison with ‘competitor’ countries (US vs Canada, India vs Pakistan, Ghana vs Côte d’Ivoire, etc.). Its benefits in terms of raising awareness at the highest policy levels has been incalculable, and it has been an integral part of the policy debates.

Nevertheless, the conceptual foundations of the HDI are weak. And this is because the conceptual foundations for handling multidimensional poverty and wellbeing are not yet strong enough to give confidence in the deployment of operational measures such as the HDI. If each of income, literacy and health improve, then we could perhaps declare an overall improvement. But what if there are movements in opposite directions? How are they to be aggregated to come up with an acceptable answer? And what is this thing that aggregation leads to? Or should we start from the meta level and define something into which each of these feeds as a component? Sen has provided a lead here in terms of his ideas on ‘capabilities’. But it would be fair to say that these ideas have not penetrated into the mainstream of poverty analysis among economists—where a simple measure based on income/ expenditure is still very much the rule. Bringing in education, health and risk as key ingredients of well-being is happening slowly, but separately, dimension by dimension, or simply as a subsidiary supplement to the income based measure. Bringing in other dimensions such as ‘voice’ integrally seems a long way off.

Even in their rational choice frame, perhaps especially in this frame, economists have not been as successful as they might wish to be in conceptualizing and then operationalizing the simultaneous evaluation of different dimensions of well-being, despite the remarkable efforts of some. There is just a thought that perhaps releasing ourselves from the straightjacket of rational choice, and moving to a more behavioural frame, might also help in this endeavour.

Ravi Kanbur is T.H. Professor of World Affairs and Professor of Economics at Cornell University. This article is based on his presentation at the opening session of the WIDER Conference on ‘Inequality, Poverty and Human Well-being’, Helsinki, 30-31 May 2003.

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