The World Bank has today2
released what it refers to as 'updated' global poverty estimates. These
new numbers are based on a new worldwide price survey and a new benchmark
international poverty line of $1.25 2005 PPP which replaces earlier benchmark
poverty lines (of $1.08 1993 PPP and $1.00 1985 PPP, both widely referred
to as "$1 per day") corresponding to earlier base years. The
revised figures purport to estimate world poverty figures for a range
of years since 1981, and thus crucially affect our understanding of the
world over the last quarter century of globalization.
Many aspects of the global order, such as the movement toward freer trade,
as well as national institutions and policies, are defended by referring
to their effect on the poor. The Bank's poverty estimates are thus central
to their assessment. Moreover, the Millennium Development Goals are defined
in terms of these estimates, making this revision of great importance
for determining whether the world is on track to reduce poverty by the
amount required by the Goals.
Can the Bank’s new estimates be trusted? Can they be trusted more than
its own earlier greatly lower poverty estimates, which they are intended
to replace? Unfortunately, the Bank’s new estimates are based on the same
methods it used earlier and are undermined by the same problems as the
earlier estimates.
Two problems are foremost, as noted in a widely cited critique by Sanjay
Reddy and Thomas Pogge3. The first is that
the Bank’s chosen international poverty line is far too low to cover the
cost of purchasing basic necessities. A human being could not live in
the US on $1.25 a day in 2005 (or $1.40 in 2008), nor therefore on an
equivalent amount elsewhere, contrary to the Bank's claims. Indeed, it
appears to be far too low in many countries to account for the cost of
purchasing basic necessities. That this is so is self-evident in the case
of the United States—the base country in whose units the international
poverty line is defined. One’s daily income can be a great deal higher
than $1.25 and still leave one unable to fulfill basic nutritional requirements,
let alone the other requirements of a minimally decent life. Since the
international poverty line is defined in purchasing power adjusted units,
meant to capture a constant level of purchasing power across countries,
this incoherence is not easy to overcome.
The Bank's claim that its poverty line is sufficient in other countries,
despite being insufficient in the United States, implicitly acknowledges
the second problem: that the Bank uses inappropriate purchasing power
parities (PPPs) to convert its poverty line across currencies. Consider
the question of how many rupiahs are needed in Jakarta to possess the
purchasing power of a dollar in Washington, D.C.: the question cannot
be answered without first establishing the purpose to which the money
is to be put. If the purpose is to purchase the goods needed to escape
severe poverty (such as staple foodstuffs, which are internationally tradable
and the prices of which tend more closely to reflect market exchange rates)
the rate of equivalence may be different than if the purpose is to buy
domestic services (which are typically relatively cheaper in poor countries
as labor is not similarly internationally mobile). We argue that the rates
of equivalence used by the Bank typically understate substantially the
relative cost of purchasing in poor countries the goods which are needed
to escape poverty. In addition, the PPPs calculated for each country inappropriately
reflect irrelevant information about the pattern of consumption in third
countries other than the country in which the price level is being assessed
and the base country with which prices are compared (the United States).
This is because the worldwide pattern of consumption determines the weights
placed on different commodities when assessing the price level in each
country. The resulting problem of country irrelevance compounds the problem
of commodity irrelevance just noted. The Bank’s new $1.25 poverty line
is itself based on an average of poverty lines allegedly used in poor
countries. However, as before many of these poverty lines have been defined
by the Bank itself and they are translated into common units using the
very PPPs the application of which is in question. The claim that the
international poverty line (whether the new or the old one) is representative
of standards prevailing in poor countries is untenable.
Within the Bank's current approach, these problems can be mitigated but
not overcome. The underlying source of the problems is the lack of a clear
criterion for identifying the poor, and that basic deficiency remains
unaddressed. The features that supposedly constitute improvements in the
Bank’s estimates lead only to increased confusion. We have no basis to
conclude that the new set of PPPs employed by the Bank generate poverty
estimates which are closer to the ‘truth’, despite the Bank’s rhetoric
to this effect. Rather, we can only conclude that they are differently
distorted than the earlier ones. The direction and extent of the new distortion
likely varies from country to country, making it all but impossible to
determine which set of estimates is more accurate. The Bank's declarations
mask the fact that it has been building castles with sand. The new PPPs
produced by the International Comparison Program do indeed incorporate
certain methodological improvements - but these are largely improvements
which have little benefit for poverty assessment. For instance, the better
measurement of the quality of government services, which is an important
source of the discrepancies between the most recent PPPs and the last,
is quite important for assessing real national incomes but largely irrelevant
for determining the number of poor.
Even if the latest PPPs present a better picture of relative prices in
2005, that does not make them a better basis to judge poverty across countries
in the previous years in which poverty must also be estimated to assess
trends. In fact, as we have shown in our work, the relative extent of
poverty in different countries and years, and the estimated trend, is
so dependent on the base year chosen for the exercise that there is no
convincing basis to pick the estimates corresponding to one base year
over those corresponding to another.
These fluctuations are inherent in the way that present PPPs are constructed,
because PPPs reflect the relative costs for a worldwide pattern of consumption
prevailing at only one moment in time, and this pattern is constantly
changing. The notion that the new PPPs constitute merely an “update” which
better captures the reality over the entire period being assessed is badly
mistaken. Rather, they merely present a snapshot of relative prices across
countries at a point in time which is no more authoritative for intervening
years than similar snapshots of the relative prices across countries taken
at points closer to those years. The use of national consumer price indices
to identify the local equivalent of the international poverty line in
years other than the base year further diminishes comparability across
country-years as each such index refers to the price of a basket of goods
with a composition entirely different from the pattern of world consumption
which is used to calculate price differences across countries in the base
year. The discrepancies can be substantial. The Bank implicitly admits
this by substituting the new $1.25 international poverty line for the
2005 U.S. equivalent of its earlier $1.08 1993 poverty line (which is
close to $1.45 in 2005 prices). Estimates of the level of poverty in each
country and of the relative extent of poverty in different countries depend
greatly on the choice of base year (and associated international poverty
line).
The new estimates of the proportion of the world’s population in poverty
suggest that the number of poor is almost fifty percent more than the
Bank had previously proposed. Although the rate of poverty reduction since
1990 is almost the same under the new estimates as the old, this appears
to be a fluke and plausibly attributable to data errors. If the final
year of the comparison is moved backward by just three years to 2002,
for instance, the rate of reduction of world poverty appears notably less
favorable under the new estimates. The only region that appears to have
had a faster rate of poverty reduction under the new estimates, regardless
of whether the period is taken to begin in 1980 or in 1991, is Latin America.
Europe and Central Asia as well as the Middle East and North Africa have
much lower rates of estimated poverty reduction according to the new estimates
than they did previously. The estimated proportion of the population that
is currently poor in Latin America has barely changed under the new estimates,
whereas it has risen by between twenty and thirty percent in sub-Saharan
Africa and in South Asia and by multiples elsewhere (by a factor greater
than four in Europe and Central Asia, greater than three in the Middle
East and North Africa and almost two in East Asia).
The enormous fluctuations in the Bank’s poverty estimates, of a kind which
would be unacceptable for most economic statistics, make them unfit for
use. The Bank has already undertaken two revisions of base year (and associated
international poverty line) and wreaked havoc to its poverty estimates
each time. Does it intend to continue on the same path? The next global
price survey which will necessitate such a revision is scheduled for 2011.
The Bank can at that point choose between pulling the rug from underneath
itself again as it has done today, continuing to use PPPs from an earlier
base year despite their growing apparent irrelevance, or admitting that
it is wrong.
The Bank's failure to take criticisms seriously and to develop new poverty
estimates in a transparent manner mean that the excuse that it is doing
the best that can be done is increasingly flimsy. There exist feasible
alternative methods These involve careful coordination of household surveys
and poverty line construction across countries, ensuring comparability
from the first and invalidating the need to use ever shifting PPPs for
the purpose. Such an effort would be along the lines of the coordination
of national accounts -- a previous crowning achievement of the United
Nations and its member countries. The subject is too important for the
world to defer to unscrutinized claims of expertise.