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Poverty

The World Bank’s new global poverty line

 

This week saw the release of the World Bank’s updated global poverty counts. There is new country-level data on poverty and inequality underlying these revisions. But the big change is that the numbers are now anchored to the 2011 Purchasing Power Parity (PPP) rates for consumption from the International Comparisons Program (ICP). Previously the numbers were based on the prior ICP round for 2005. The Bank published a reasonably clear Press Release explaining that the new international poverty line is $1.90 per person per day at 2011 prices; also see this blog post by Bank researchers.

Some observers have said that $1.90 entails a large upward revision to the Bank’s global poverty line. An article in the Financial Times ran the headline that “The Earth’s poor set to swell as World Bank shifts poverty line.” Similarly, ’in this Vox piece, CGD’s Charles Kenny and Justin Sandefur claim that this is “the biggest upward revision of the poverty line in 25 years.”

The FT article went further to suggest why this has happened, quoting Angus Deaton, a Professor at Princeton, as claiming that the Bank has an “institutional bias towards finding more poverty rather than less.” By this view, there is a motive to the Bank’s seemingly large upward revision to its poverty line—to keep itself in business as the leading institution fighting global poverty. But this conspiracy theory makes little sense on closer inspection.

We must first understand that the $1.90 is in 2011 prices while $1.25 was in 2005 prices. Everyone knows about inflation. But how should one deal with inflation for this purpose? If one simply updates the $1.25 line for inflation in the U.S. one gets $1.44 a day in 2011. This was done in some calculations soon after the release of the 2011 ICP results, such as those by CGD researchers reported here. Updating the line for U.S. inflation 2005-11 greatly reduces the global poverty rate for 2011 when compared to the old PPPs.

However, fixing the U.S. purchasing power of the international line over time is very hard to defend given the generally higher inflation rates in developing countries than the U.S. Thus, while $1.44 a day in 2011 has the same purchasing power in the US as $1.25 in 2005, when $1.44 is expressed in local currencies of developing countries using the 2011 PPPs it has lower purchasing power in most of those countries than when the prior $1.25 line in local currency is adjusted for inflation in those countries. In that sense, using $1.44 in 2011 lowers the poverty line, and that is why one gets less poverty.

Instead, the Bank’s researchers went back to the national poverty lines for low-income countries that were used to derive the $1.25 a day line, as described here. They then updated those national lines to 2011 prices using the best available country-specific Consumer Price Indices. On then converting to PPP for 2011 and taking an average they got $1.90. This is not the only way one could have updated the $1.25 a day line. One could instead have asked what the average national line is amongst the poorest “x” countries in 2011, which would have been more consistent with past methods used by the Bank. But the method they have used to get to $1.90 is defensible, and it has the appeal that the underlying national lines for low-income countries have constant purchasing power over time.

This is surely a strange way for the Bank to reflect the claimed bias toward overstating the extent of poverty. More plausibly, in my view, there is no such bias since the real value of the line is being held constant in poor countries.

Furthermore, none of this makes much difference to the pace of progress against extreme absolute poverty over time. As the Bank announced in its Press Release, that progress remains largely unchanged from the old PPPs. Indeed, the PR is quite upbeat on the pace of progress. This hardly sounds like a bias toward exaggerating the extent of global poverty!

There are, nonetheless, changes in the composition of the world’s poor, as the new ICP round has revised the PPPs for many countries. Those changes are not yet well understood. (See, for example, my comments here on India’s new PPP.) As I noted in a recent blog post, “We need better global poverty measures,” the ICP has not been as open as one would like about their price data. And the raw PPPs are not well suited to poverty measurement. The Bank’s researchers have done some “patch-ups” (such as adjusting for the evident urban bias in the ICP’s price surveys), but a more fundamental ICP overhaul is needed if the PPPs are to continue to be used in global poverty measurement.

I also argued in the same blog post that the absolute line of $1.25 a day in 2005 prices (or $1.90 a day in 2011 prices) is inadequate today. Two global poverty lines are now needed—a lower line with fixed purchasing power across countries and a new upper line given by the poverty line that one would expect given the country’s level of average income, based on how national poverty lines vary across countries. The true welfare-consistent absolute line—whereby one judges poverty by a common absolute standard of welfare, which may well require differing commodities in different settings—lies somewhere between the two bounds. By this approach, to be judged “not poor” one needs to be neither absolutely poor (independently of where and when one lives) nor relatively poor (depending on where and when one lives). Global poverty estimates for both bounds can be found here; the upper bound suggests less progress against poverty, but still progress. If anything, the World Bank is overestimating the pace of that progress.

My advocacy of this new “upper bound” is not some bias toward over-estimating poverty for some conspiratorial reason. Rather it recognizes the differing social realities of what is needed to not be considered poor in today’s world. The World Bank, and its critics, also needs to recognize those realities.

Martin Ravallion

(This was first posted on the Center for Global Development’s Policy Blog.)

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