This paper argues that it is inadequate to exclude any poor people in a global poverty measure merely based on the income-level of the country they live in. A truly global measure will likely reveal a less optimistic picture of the success of our development approaches.
Background Paper No. 4
By Terri B Chapman
The World Bank estimates that 9.2 percent of the world’s population lives in extreme poverty and that an additional 119 and 124 million people have fallen into poverty due to the Covid-19 pandemic so far. But these estimates may be significantly understating the scale of global poverty. The fact is, we do not actually know how much of the world’s population is really poor.
That might seem strange in an era when policymakers have access to significant amounts of data. After all, measuring poverty at the global level is central to understanding whether international approaches to development are working. While almost all countries measure poverty at the national level, global estimates, if done well, could shed light on overall development progress around the world, help us evaluate the extent to which these approaches are working, and keep poverty on the international agenda.
The World Bank’s 'dollar a day' international poverty line (IPL) is the most widely used estimate of global poverty. Proponents of the IPL argue that its value is both in its simplicity and the fact that it uses a common yardstick against which to measure poverty between countries. While it is commonly used and does offer some advantages, it suffers from important shortcomings. Some critics deem it inadequate that the international poverty line uses an absolute rather than a relative approach; argue that its reliance on purchasing power parity (PPP) exchange rates is problematic; and object to its monetary rather than non-monetary or multidimensional approach. Additionally, the international poverty line is a poor measure of global poverty as it excludes the poor in middle- and high-income countries.
Not counting the poor in all countries has implications for the way that we understand poverty, including its pervasiveness, and the relationship between economic growth, poverty, and inequality. That is not to say that poverty in South Asia or Sub-Saharan Africa is the same as poverty in North America or anywhere else – it is not.
While not aiming to compare what it means to live in poverty in different countries, this paper argues that it is inadequate to exclude any poor people in a global poverty measure merely based on the income-level of the country they live in. A truly global measure will likely reveal a less optimistic picture of the success of our development approaches.
The World Bank’s International Poverty Line
The World Bank’s global poverty measure is not only the most commonly used indicator, but it is also very influential in shaping discourse around poverty, defining priority geographies, and allocating resources. The World Bank approach sets an international extreme poverty line based on the absolute poverty lines of poor countries. In the first stage, the average of the national poverty lines of the 15 poorest countries is taken, using the 2011 PPP exchange rates. In the second stage, that line is translated back into national currencies using PPPs. The headcount ratio is calculated for each country based on this international line in local currency. While it is called the 'dollar a day measure,' due to its initial threshold, today it is set at USD 1.90 per day. The rationale for using this measure is that it applies the same ruler to all countries. In so doing, it treats all people equally. Another advantage to this approach is that it removes domestic political interests by setting an international line rather than relying solely on the poverty estimates reported by each country.
While the international poverty line was intentionally set at a low level, it has received stark criticism for being too low. In response to this common critique, The World Bank now also reports two additional absolute poverty lines at USD 3.20 per day and USD 5.50 per day. These lines are calculated the same way but use lower middle-income and upper middle-income countries' median national poverty lines.
Three Prevalent Criticisms
There is an enduring debate about whether poverty should be measured in absolute or relative terms. Absolute poverty is based on whether a person, family, or household has sufficient basic resources to attain a pre-determined standard of living. Absolute poverty lines are defined by a set of resources required to achieve a minimum level of well-being, either in income or consumption. Absolute poverty lines are typically determined by creating a basket of necessities such as food, shelter, and clothing, pricing those goods, and setting the national poverty line accordingly. The United States, for example, has a poverty line based on three times the minimum food requirement. Absolute poverty has historically been the primary approach to measuring poverty and remains more common in less developed countries.
Relative measures of poverty are concerned with how well-off people are in relation to others. Relative measures use a threshold defined in relation to the distribution. Today, most industrialized countries use relative measures, typically 40, 50, or 60 percent of the median income. The relative approach is rooted in the idea that people need to be able to participate in society, which may require more than basic necessities. One feature of the relative measure is that if overall incomes increase, the absolute value of the poverty line will also increase. Similarly, if living standards decline, the absolute value of the poverty line will decrease.
Absolute poverty measures are criticized for overlooking the social welfare aspects of poverty. At the same time, relative lines are critiqued for not addressing the overall improvements or declines in living standards within the population. The World Bank measure of global poverty is an absolute measure and has thus been criticized by proponents of relative measures. While the World Bank uses an absolute measure, other organizations use relative measures, including the Organization for Economic Co-operation and Development (OECD) and the European Union (EU).
Martin Ravallion, one of the World Bank's global poverty measure architects, suggests that a new absolute and weakly relative measure is needed. “A hybrid approach combining absolute and weakly-relative measures is called for to reflect both subsistence and social inclusion. By the proposed approach a person is poor if she is either below the common global standard or living below the poverty line one would expect given the average income in the country of residence. This gives us truly global poverty measures—that span countries at all levels of development." Moreover, following the work of colleagues Jolliffe and Prydz, the World Bank now introduced the Societal Poverty Line (SPL), which has features of both absolute and relative poverty measures.
A second criticism of the ‘Dollar a Day’ measure relates to purchasing power parity (PPP) exchange rates. What can be bought with the local currency equivalent to one dollar differs substantially between countries. PPP exchange rates allow comparisons to be made, which differ from market exchange rates. The International Comparison Program (ICP) at the World Bank collects price data for a basket of goods and services in different countries. It calculates exchange rates based on the price of those goods compared to the price of the same basket elsewhere. This is useful for comparing purchasing power in different places.
But the use of PPP exchange rates in the measurement of poverty can be problematic. Critics contend that it is based on an idea of purchasing power ‘equivalence’ that is “poorly defined and inappropriate” for poverty assessment. In addition, because PPP exchange rates are designed for national accounting, they do not reflect the consumption patterns of the poor. National average prices may be very different from the prices paid by the poor, e.g., due to poor people’s location of living and inability to plan purchases. Moreover, the consumption weights are based on national accounts, which are again likely to be very different for individuals near or below the poverty line.
One of the other issues with using PPP exchange rates is significant differences in poverty measurements between PPP rounds and revisions. The PPP rounds are 1985, 1993, 2000, 2005, 2011 and 2017. With new rounds, which typically entail methodological changes, revisions are made to past estimates. These changes in estimates, even within the same country, have led many to challenge the soundness of these measures altogether. The PPP data between different revisions are also not comparable, making observations of poverty trends impossible. The Nobel Prize-winning economist Angus Deaton suggested that the current approach to PPP use in global poverty should be replaced with a new bundle of goods that is specifically relevant to the poor, even if this approach does not address all of the underlying issues with using PPPs.
In response to the SDGs, the World Bank established the Atkinson Commission in 2016 to evaluate its approach to measuring global poverty. The Commission recommended that PPP's be used in constructing a baseline, and that national poverty lines be adjusted to match local price changes, allowing for more accurate assessments of the changes in the level of extreme poverty. Moreover, the Commission suggested that the errors needed to be better understood and more explicitly communicated, as the appearance of precision masks uncertainties in what is a highly influential measure. But this goes only so far: arguably a more accurate picture can be constructed through a coordinated approach to setting poverty lines at the national level and measuring poverty in each country according to each national poverty line. Klasen suggested that one way of sidestepping issues related to PPPs would be to create an “internationally coordinated national poverty measurement.” This would entail aligning the methods used for defining poverty lines at the national level in each country, calculating poverty rates within countries using domestic currencies, and then taking the sum of these estimates for all countries to arrive at an international poverty estimate.
The third major line of criticism relates to whether poverty should be assessed in monetary or non-monetary terms, or both. Monetary measures use income or consumption to evaluate poverty, drawing primarily on household surveys. Due to data availability, income is more commonly used among industrialized countries and consumption among less developed countries. Non-monetary measures, on the other hand, look at a broader range of deprivations, including education, housing, and health. It is widely accepted that poverty is multidimensional and that there are non-monetary aspects of poverty.
Nobel Laurate Amartya Sen’s capability approach is central to these debates. Sen highlights the ‘ends’ rather than the ‘means’ alone as significant in our understanding of poverty. Rather than looking only at the available resources individuals have – such as income — Sen suggests that it is not the quantity of a commodity that matters, but the functioning a person can get from a given commodity that is important. Capabilities are the intermediaries between commodities and functionings. Sen’s capabilities approach is the underlying concept behind the Human Development Index (HDI).
The HDI is a composite indicator of human development based on three dimensions: a long and healthy life, knowledge, and a decent standard of living. Many other indices have been developed that measure poverty and human development, including the U.N. Multidimensional Poverty Index (MPI). In addition, in response to the Atkinson Commission Recommendation, which recommended the inclusion of complementary poverty indicators, the World Bank developed a Multidimensional Poverty Measure.
Other poverty dynamics are also essential and missed by the 'dollar a day’ measure. For example, the intensity and timing of poverty, whether chronic or transient, and whether it is compounded. Poverty gap measures, for instance, look at the distance from the poverty line rather than just the share of people below the line. This sheds light on how poor people are, not just whether they are poor or not. Researchers have also found that the timing of poverty experienced in the life course is significant in determining individual outcomes. The length of time that people are poor also determines the kinds of interventions required. The TIP curves developed by Economics and Social Policy Professor Jenkins look at the incidence, intensity, and inequality of poverty, thus illustrating the various dynamics of poverty that go beyond the headcount ratio. Not only do these facets of poverty matter, but there are also different types of poverty, including those that result from the deprivation of other things like health. Looking at poverty measures cumulatively may be more reflective of reality than prioritizing one measure over another.
Better Indicators Needed
Reducing poverty is at the heart of development and social and economic progress. It is also at the forefront of the Sustainable Development Goals. Much work has been done on defining poverty, measuring it, and understanding what works and what does not in addressing it. However, at the international level, constraints to consistently measuring global poverty are potentially distorting the collective understanding of its complexity and pervasiveness, and the ability to evaluate and redress it. Moreover, the lack of a reliable global poverty estimate that is comparable over time means that evaluating development approaches is nearly impossible. The World Bank's dollar-a-day measure has been helpful in its simplicity and provision of a common ruler against which to measure poverty between countries. It is also an approach that doesn’t rely on national poverty estimates which can be unreliable. However, it is not a truly global poverty estimate despite its usefulness: it is a measure of poverty in low-income countries. To truly gauge the extent of global poverty, the number of poor people in all countries must be included. Such a measure (or group of measures) would allow for more comprehensive analysis of global development strategies, and the links between growth, poverty, and inequality.
Terri B Chapman is Program Manager with the Economic Progress Initiative at Observer Research Foundation America.
Disclaimer: Terri B Chapman is a consultant for the World Bank.