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An interesting step backwards in measuring global poverty

A new paper by Robert Allen, “Absolute Poverty: When Necessity Displaces Desire” (American Economic Review, December 2017), has proposed and implemented a method of measuring global poverty. Allen advocates this as an alternative to the World Bank’s longstanding method using Purchasing Power Parity (PPP) rates across countries in trying to assure that the international poverty line has constant purchasing power globally.

At the core of Allen’s method is the use of Linear Programming (LP) to set a least-cost diet for attaining stipulated nutrients, following George Stigler (“The Cost of Subsistence,” Journal of Farm Economics, 1945). Allen estimates country-specific least-cost diets anchored to globally-constant nutritional requirements with an allowance for spending on his stipulated bundle of non-food goods. Allen does not present his method as a complement to the Bank’s, but as superior. He claims that his method yields substantially high global poverty counts than the World Bank’s $1.90 a day line.

My comment on Allen’s paper, “An Interesting Step Backwards,” argues that his proposed method is the resurrection of a method famously rejected long ago, including by Stigler, because it produces poverty lines of little social relevance. From the point of view of the history of thought on poverty, it is interesting to see what this old method delivers with new data for the developing world.

On a close inspection of his results and on doing some extra calculations, I find that his claim that the global absolute poverty count is much higher than currently thought, based on the Bank’s $1.90 line, is no longer true when one uses nutritional requirements that would seem to accord more closely with practice in low-income countries. This gives a much lower poverty count than the Bank’s $1.90 line. I also argue that there is an urban bias in the prices Allen uses for valuation, which raises his counts relative to the national lines in low-income countries that have been used to determine the $1.90 line.

The comment argues that Stigler was right, and the method Allen proposes should still be rejected, based on Allen’s own findings. PPP’s remain essential for global poverty measurement.

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