Escaping Poverty: Nobel Prize Winner Angus Deaton´s Impact on Developmental Economics

The latest recipient of the Nobel Prize in economics, Princeton professor Angus Deaton, has been a pioneering force in the analysis of consumption patterns, poverty and welfare. In his bid to rid the world of poverty, he has greatly contributed to the growth in the field of developmental economics. His recognition reinforces his influence in the field but whether this will translate into an increased influence on policy practices is yet to be seen.

His earlier work redefined the factors observed in determining fiscal policy impacts on consumer welfare. In the 1980s, Deaton worked with John Muellbauer to formulate the Almost Ideal Demand System, a set of equations assessing household demand for various goods for a given time period and a given total expenditure for that period. Previous methods of aggregating individual demand statistics were simplistic, measuring the economy-wide average demand and average spending. Deaton expanded on Muellbauer´s ideas by accounting for whether the goods consumed were luxuries or necessities and demographic variables like age, gender and family composition. By also looking at different household price perceptions based on income, his work better portrayed the disproportionate impact of taxes on consumer demand of the poor and the wealthy.

Deaton is also famed for unifying theory with aggregated data. In studying the link between consumption patterns and changes in income, Deaton argued against Milton Friedman´s influential Permanent Income Hypothesis, which assumed that changes in consumption would vary by more than changes in income. Friedman´s theory stipulated that consumers tend to smoothen consumption patterns overtime by saving when income is expected to drop while borrowing when it is expected to rise. This was disproved by Deaton who discovered that consumption changed at lower rates than changes in income. Consumption also depends on factors other than expected income like demographic factors such as age, with greater variance in consumption levels between individuals as they age. Consumers also face constraints when they choose to finance their consumption through debt. Deaton´s work helped governments project consumption levels for various degrees of change to income and thereby consumer welfare.

Deaton´s most recent work focused on accurately determining the welfare of those in the poorest countries where reliable data and resources are hard to come by. Rather than trying to narrow individual household statistics using aggregate GDP, Deaton used household surveys and looked at cross-sectional information between population groupings instead of just for each household, which proved to be more effective. Using this data he estimated local prices, differentiated welfare standards between adults and children and inferred levels of household sexual discrimination against young females. Investigation of consumption levels showed child consumption is 30 to 40% that of adults meaning per-capita consumption measures overestimated poverty levels. Deaton also investigated whether the consumption of adult goods like tobacco or alcohol decreased with the presence of children and whether this depended on the child’s gender in order to infer the amount of resources devoted to daughters.

A leading figure in developmental economics, Deaton established the foundation for data collection on consumer demand, consumption and welfare, yet remains a controversial figure for his opposition to foreign aid to developing countries. He maintains that foreign aid perpetuates poverty by creating a dependence on aid and discouraging governments from realizing their own developmental policies. Instead, Deaton advocates alternatives to traditional foreign aid such as subsidizing healthcare and drugs, thereby incentivizing pharmaceutical companies to develop new drugs to combat diseases that mainly affect the poor. He also encourages relaxation of trade barriers against poorer countries and increasing the flow of information about technology and more efficient management practices.

Deaton also worked with the World Bank recently to adjust the poverty line from US$1.25 per day to US$1.90, based on new purchasing power parity (PPP) levels and economy sizes. However, he remains a vocal critic of the poverty line as a general measurement of welfare. He argues that the poverty line is based on changing PPPs and weak underlying data while also noting the institutional bias of the World Bank towards finding more poverty to justify its purpose of eradicating extreme global poverty. The change in the poverty line is expected to increase the number of those living in poverty by 148 million, however the World Bank shows no intention of reconsidering its decision to rely on this standard.

Despite Deaton´s provocative arguments on financial aid and the state of global poverty levels, global trends seem to agree with the view that financial assistance to poor countries is crucial to development with the World Bank being involved with over 12, 000 projects  in over 172 countries. Nonetheless, perceptions on aid are changing with the amount being invested into healthcare funds trebling since 2000. In the recent UN General Assembly meeting, member states have also adopted some of these alternative approaches to providing aid to developing economies in their sustainable development goals. This will provide a precedent for future policies.

Michael Kang

About Michael Kang

Michael Kang is currently in his fourth year at the University of Toronto and is also a Research Analyst Intern at the NATO Association of Canada. He is pursuing a double major in both International Affairs as and Economics. With strong interests in the fields of foreign policy, security policy and economics, he has been involved in such activities as being an article contributor for a student news website called Affairs Today and was a finalist in the Rotman Financial Risk Management case competition. Michael intends to pursue his interests in economic and foreign policy by hopefully becoming involved in policy making with the Canadian government or an NGO. In his personal time he enjoys studying the French language and culture and is also an avid soccer fan.