Abstract
Poverty, the quintessential denominator of a developing nation, has been traditionally defined against an arbitrary poverty line; individuals (or countries) below this line are deemed poor and those above it, not so! This has two pitfalls. First, absolute reliance on a single poverty line, based on basic food consumption, and not on total consumption distribution, is only a partial poverty index at best. Second, a single expense descriptor is an exogenous quantity that does not evolve from income-expenditure statistics. Using extensive income-expenditure statistics from India, here we show how a self-consistent endogenous poverty line can be derived from an agent-based stochastic model of market exchange, combining all expenditure modes (basic food, other food and non-food), whose parameters are probabilistically estimated using advanced Machine Learning tools. Our mathematical study establishes a consumption based poverty measure that combines labor, commodity, and asset market outcomes, delivering an excellent tool for economic policy formulation.
Highlights
Poverty, the quintessential denominator of a developing nation, has been traditionally defined against an arbitrary poverty line; individuals below this line are deemed poor and those above it, not so! This has two pitfalls
There is the third approach, an accepted wisdom of multidimensional poverty[11,12,13]. This existing literature on multidimensional poverty requires multiple subjectively determined thresholds. All these three approaches suffer from two drawbacks that they do not link poverty or consumption deprivation (CD) to the general working of the broader economic system that generates this poverty, and they do not provide a method of predicting the future level of poverty as a function of controllable economic parameters
Chattopadhyay et al.[23] applied this stochastic portfolio on labor markets, commodity markets, and asset markets to link the poverty index with the entire working of the economy, which is so essential for economic policy to reduce poverty[24]
Summary
The quintessential denominator of a developing nation, has been traditionally defined against an arbitrary poverty line; individuals (or countries) below this line are deemed poor and those above it, not so! This has two pitfalls. The second and more commonly used poverty approach depends on a poverty line that is obtained independently and exogenously This trend started in 1901 with Rowntree[4], who defined poor as individuals with income below the poverty line level of income needed to cover basic needs. They[15] established empirically that there exists a commodity hierarchy of needs, complementing a series of concave Engel curves as functions of residual income, leading to a phenomenological representation of the Engel curve[16,17], using a Michaelis–Menten model[18], where the concave function represented real consumption of cereals (which ranked as the first basic need) as a function of income, proxied by total expenditure They used the cereal CD as the deprivation function of Atkinson[19] to demonstrate that cereal CD index serves as a poverty index. The time varying income and consumption series from such a model enable us to derive a probabilistically validated poverty index that could predict future poverty lines
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