Time to rethink global poverty measures

Today we find two main approaches to measuring poverty and monitoring progress in reducing it. The first focuses on “absolute” measures that strive to use poverty lines with constant real value. For example, this is essentially what the official poverty measures for the US strive to do. It is also how the World Bank measures global poverty, aiming to apply a “rigidly unchanged” real line across countries as well as over time.

The second approach uses “relative” measures for which the poverty line varies in real terms, being set at a constant proportion of the current mean or median—an approach that emerged in the 1960s and became popular in Western Europe in the late C20th. There has been much debate on the choice between absolute versus relative measures.

In a new paper, “On Measuring Global Poverty,” I argue that neither approach makes economic sense. A new approach is needed for measuring and monitoring global poverty going forward.

The nub of the problem is that existing poverty measures tend to opt for one of two very different assumptions, neither of which can be seen as acceptable any longer:

• that relative income does not matter to economic welfare, or
• that relative income is all that matters.

When applied globally, the fixed real line cannot capture relative economic deprivation at country level or the need for higher outlays for economic well-being in richer countries—a higher cost-of-living not reflected in the existing Purchasing Power Parity (PPP) rates. However, it is no less obvious that the absolute standard of living, at given relative income, also matters, thereby ruling out measures in which the poverty line is set at a constant proportion of the mean or median.

The new paper proposes a welfarist interpretation of global poverty lines, which is augmented by the idea of normative functionings, the cost of which varies across countries. In this light, current absolute measures are seen to ignore important social effects on welfare, while popular strongly-relative measures ignore absolute levels of living. It is argued that a new hybrid measure is called for, combining absolute and weakly-relative measures consistent with how national lines vary across countries.

Illustrative calculations indicate that we are seeing a falling incidence of poverty globally over the last 30 years. This is mainly due to lower absolute poverty counts in the developing world. While fewer people are poor by the global absolute standard, more are poor by the country-specific relative standard. The incidence of purely relative poverty has been rising in the developing world, as can be seen from this graph. The vast bulk of poverty, both absolute and relative, is now found in the developing world.