Poverty measurement $1-a-day Criticisms Conclusion References

Are poverty measures based on the a dollar-a-day poverty line a reasonable concept for thinking about poverty across the world? What does it show?
Leoni Linek

February 13, 2012

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Poverty measurement $1-a-day Criticisms Conclusion References

Table of contents Poverty measurement Motivation Poverty line $1-a-day IPL in 1990 IPL in 2000 Criticisms Overview (1) A meaningless IPL (2) A poor concept of PPP (3) False precision Conclusion
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Poverty measurement $1-a-day Criticisms Conclusion References

Motivation Poverty line

Why should we be concerned with measurement?

It seems that a xed notion of poverty is indefensible

income or consumption poverty? relative or absolute poverty? material deprivation or social exclusion? lack of capability and functioning or lack of basic needs?

Poverty is multi-faceted. As a consequence, poverty lines are always approximations to a threshold that is truly fuzzy (Ray, 1998, p.253).

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Motivation Poverty line

Some alleged facts

Global poverty rates ... declined signicantly over the last three decades. (Sala-i Martin, 2006). The absolute number of those living on $1 per day or less continues to increase. The worldwide total rose from 1.2 billion in 1987 to 1.5 billion today (World Bank, 2000a). There were 100 million fewer poor people by the $1 a day standard at the end of the 1990s than at the beginning (Chen and Ravallion, 2001). Diering positions about poverty and its recent development stem from dierences in both data and measurement (and hence dierent underlying concepts and denitions of poverty).
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Motivation Poverty line

Measurement matters

This is not a trivial matter of disagreement, but can have serious consequences. Poverty estimates inuence ones assessment of
the the the the seriousness of the problem of poverty (incidence, extent) amount of resources that should be devoted to reducing it regions to which these should be directed instruments that are eective at reducing poverty

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Motivation Poverty line

Poverty line

The notion of a poverty line lies at the heart of all discourse on poverty. A poverty line is a critical threshold of income, consumption, or, more generally access to goods and services below which individuals are declared to be poor. (Ray, 1998, p.250) World Bank (WB) and UN use a $1-a-day threshold But there is serious disagreement about how an international poverty line (IPL) should be constructed in general and in particular about the methodology employed by the WB.

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Motivation Poverty line

Disagreement about the poverty line Units of measurement:

monetary units (e.g. domestic currency, international $) non-monetary units (e.g. nutrition-based: minimum caloric intake)

Position of poverty line:

UN MDGs use $1-a-day WB uses both $1 and $2-a-day Bhalla (2002) suggests $1.5-a-day (or rather upward adjustment of 15%) Pritchett (2006) argues it should be $15-a-day

Baseline year:
WB in 1990 dened poverty line as 1.02$ in 1985 prices WB in 2000 changed to 1.08$ in 1993 prices
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IPL in 1990 IPL in 2000

The $1-a-day IPL from 1990 In 1990 the WB

constructed an IPL from a set of domestic poverty lines from 33 countries from the 1980s scaled these poverty lines up- or downwards according to changes in the consumer price index (CPI) to determine their equivalent in 1985 domestic currency units then converted these national currency amounts into a common unit of real purchasing power equivalence using 1985 purchasing power parity (PPP) conversion factors (expressed in local currency unit per international dollar)

An IPL of $31 per month was chosen, which corresponds to $1 (or more precisely $1.02) per day.
Rationale: the domestic poverty lines of 6 of the poor countries from the sample (converted into dollars) were very close to this IPL, which was thus considered to reect a poverty line typical for poor countries. (Ravallion et al., 1991)
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IPL in 1990 IPL in 2000

The $1-a-day IPL from 1990 (continued)

Later in the 1990s this IPL was revised (without explanation) to $30.42 per month or $1 per day in 1985 (Chen and Ravallion, 2001). This IPL was then converted into the national currency units using Penn World Tables PPP conversion factors with 1985 as a base year, and national poverty lines were derived. For a particular year, these national poverty lines were then adjusted to changes in the CPI and applied to household data to get estimates of the number of poor people.

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IPL in 1990 IPL in 2000

The $1-a-day IPL from 2000

In 2000 the WB
constructed a new IPL, this time with 1993 as a base year. identied from the same 33 countries the 10 countries with the lowest domestic poverty line (converted rst into 1993 national currency units using CPI changes, and then, using PPP, into 1993 international dollars) chose the median of these

As a result, the WB arrived at the new IPL of $1.08 per day PPP 1993 (World Bank, 2000b).

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Overview (1) A meaningless IPL (2) A poor concept of PPP (3) False precision

Criticisms of the $1-a-day IPL

Three problems with World Banks measurement of poverty

1. use of an arbitrary poverty line, does not allow for inter-temporal and inter-spatial comparisons and is not rooted in an identication of the real requirements of human beings 2. use of a concept of purchasing power equivalence, which is not well-dened or appropriate 3. false precision and incorrect extrapolation from limited data

(Reddy and Pogge, 2010)

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Overview (1) A meaningless IPL (2) A poor concept of PPP (3) False precision

(1) A meaningless international poverty line The WBs IPL is dened in abstract money units and does not directly refer to some elementary requirements.
It would be more meaningful to establish an IPL in terms of the cost of achieving certain elementary ends (e.g. the ability to be adequately nourished).

The IPLs from 1990 and 2000 cannot be compared because PPP dollars from dierent years cannot be compared. As a consequence, it is impossible to determine whether the two IPLs dier and, if yes, which one is higher.
Chen and Ravallion (2001) claim they are roughly equivalent as the headcount is approximately the sam. Reddy and Pogge (2010) suggest using the CPI to transform 1985 national poverty lines into 1993 national currency units and then comparing the result with the 1993 national poverty line. They nd that the IPL 2000 has e.g. raised Nigerias poverty lines and lowered Mauritanias.
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Poverty measurement $1-a-day Criticisms Conclusion References

Overview (1) A meaningless IPL (2) A poor concept of PPP (3) False precision

(2) A poor concept of purchasing power "equivalence" For country comparisons and aggregations, the translation of the IPL from the abstract money units (international dollars) into local currencies actually is necessary. This requires the use of purchasing power equivalence or PPPs.
dicult to derive the amount of local currency equivalent to the IPL because prices vary and PPPs depend on the weights assigned to dierent commodities. World Bank now uses EKS (Eltet Kves Szulc) method, before used GK (Geary Khamis)

3 Problems of existing PPPs

(i) They do not specify an achievement concept (ii) They are inappropriate for poverty measurement (iii) They do not allow for inter-temporal comparisons
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Overview (1) A meaningless IPL (2) A poor concept of PPP (3) False precision

(2) A poor concept of purchasing power "equivalence" (i) They do not specify an achievement concept.
The concept of equivalence can only be meaningful in relation to an achievement concept: If one currency amount (at a point in time and space) suces to achieve the same end as another currency amount, they can be deemed equivalent.

(ii) They are inappropriate for the assessment of poverty:

Commodity Irrelevance: PPPs involve aggregating information on quantities and prices of all sorts of goods, many of which are disproportionately consumed by the non-poor. Surely, the price of luxury goods should not aect poverty. Country Irrelevance: Because PPPs are used to compare countries, they are calculated on the basis of prices and quantities of all commodities in the relevant countries. Surely, the quantities and prices of commodities in another country should be irrelevant to a countrys poverty.

Existing PPPs violate the independence of irrelevant alternatives.

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Poverty measurement $1-a-day Criticisms Conclusion References

Overview (1) A meaningless IPL (2) A poor concept of PPP (3) False precision

(2) A poor concept of purchasing power "equivalence"

(iii) They do not allow for inter-temporal comparisons

PPPs of dierent base years are not comparable across years (rather designed for interspatial comparisons) Fundamental dilemma when using existing PPPs:
1st option: commit to some PPP base year once and for all. Problem: Global consumption pattern will shift and no longer be reected by baseline. 2nd option: replace previously chosen base year periodically by a later one. Problem: Each time a new base year is abandoned, all estimates must be discarded, too.

Poverty headcounts and geographic distribution are greatly inuenced by the choice of base year.

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Overview (1) A meaningless IPL (2) A poor concept of PPP (3) False precision

(3) False precision and incorrect extrapolation The WB reports purportedly precise estimates without an estimation of the likely error Possible sources of measurement error
WB uses consumption data from household surveys (large discrepancies between consumption reported in household surveys and national income accounts). Errors associated with countries containing large numbers of poor people: India participated in the 1985 ICP benchmark survey, not in the one in 1993; China participated in neither. PPPs for both countries have been derived in a dierent manner than those of other countries. The poor might face dierent prices than the non-poor, e.g. because of where they buy (semi-peripheral/ rural areas, possibly less competitive retail market structures), quantities in which they buy (small due to credit and storage limitations), or because of who they are (social marginalization, etc.).
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Conclusion

Overall, the World Banks $1-a-day IPL is certainly not an ideal, and possibly even quite a bad poverty measure. Whether it over- or underestimates poverty is dicult to say, as it depends on the country, year, etc. although the latter might be more likely.
Heres an example: Using the 2000 $1-a-day IPL for the US in 2009, income or consumption of $1.37 per day ($500 per year) would get a person counted as non-poor.

However, the $1-a-day IPL continues to be the most widely-used measure.

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Ways forward

Ignore issues and stick to the $1-a-day IPL .

Bulk of the WBs work (e.g. regional) does not use it anyways. With a clear understanding of the assumptions, there should be no confusion.

Alter the $1-a-day IPL by using poverty-related PPP (PPPP), focusing on commodities required to avoid poverty, instead of general consumption PPP.
Does not address all criticisms (e.g. country irrelevance, meaningless of IPL) Preliminary results suggest that such re-weighting will not lead to a signicant change (Deaton and Dupriez, 2007).

Measure poverty using an alternative methodology.

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Bibliography
Bhalla, S. (2002). Imagine Theres No Country: Poverty, Inequality, and Growth in the Era of Globalization. Peterson Institute for International Economics. Chen, S. and Ravallion, M. (2001). How Did the Worlds Poorest Fare in the 1990s? Review of Income and Wealth, 47(3):283300. Deaton, A. and Dupriez, O. (2007). Poverty PPPs for Latin America and Asia. Mimeo, development data group, World Bank. Pritchett, L. (2006). Who is Not Poor? Dreaming of a World Truly Free of Poverty. World Bank Research Observer, 21(1):123. Ravallion, M., Datt, G., and van de Walle, D. (1991). Quantifying Absolute Poverty in the Developing World. Review of Income and Wealth, 37(4):34561. Ray, D. (1998). Development Economics. Princeton University Press. Reddy, S. G. and Pogge, T. (2010). How Not to Count the Poor. In Anand, S., Segal, P., and Stiglitz, J. E., editors, Debates on the Measurement of Global Poverty. Oxford University Press. Sala-i Martin, X. (2006). The World Distribution of Income: Falling Poverty and ... Convergence, Period. The Quarterly Journal of Economics, 121(2):351397. World Bank (1999/2000a). World Development Report. World Bank (2000b). World Development Report.
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