World Bank new poverty estimates: more confusing than ever

by Nicolo Tomaselli, Eurodad, Bretton Woods Project, 29 September 2008

The World Bank finally published a new count of the extreme poor worldwide in August. As expected the new figures are fuelling the ongoing debate on poverty estimates. (See Updates 59, 61)

Researchers and academics have long argued about how many poor people there are, how poor they actually are and how we should measure the characteristics that define poverty. The report's conclusion is clear-cut: the number of poor people is larger than previously thought. But not to fear, as argued by Duncan Green of Oxfam, "no-one on the ground will feel any more poor as a result of this statistical revision."

The revisions are the work of World Bank economists Ravallion and Chen, in their paper: The developing world is poorer than we thought, but no less successful in the fight against poverty. The statistical exercise was prompted by the release of new data on domestic prices across the world and thus new purchasing power parity indexes (PPPs) (see Update59). The new poverty snapshot also took into account the adjustments made by the Bank to the international poverty line in May (see Update 61), replacing the old line of $1.08 per day at 1993 prices with the new line of $1.25 at 2005 prices.

According to the new paper, there are 1.4 billion people living in extreme poverty, not the less than one billion previously thought. The researchers also used the new data to re-estimate poverty in the past, arguing that the historical decline in poverty has been as great as previously thought. However, the study suggests that the new $1.25 poverty line means that the number of poor people decreased in absolute terms by 27 per cent between 1981 and 2005. The same estimate using the old set of data showed a bigger decrease of 37 per cent. =

Many aspects of globalisation and the Bank's economic development paradigm are defended by referring to their beneficial effect on the poor, making assessments of poverty pivotal. The study finds that the number of people living on the equivalent of less that $2.50 per day using the new PPPs increased over time by roughly 15 per cent.

More disappointing is the fact that the extent of poverty in Africa has increased constantly over time in absolute and relative terms, whichever figures you use. According to the report, therefore, the poverty decline is largely caused by progress in East Asia, especially China. The reality, as a recent UN report said, is that in most developing regions the number of poor is rising and in Sub Saharan Africa "the depth of poverty [is worse] than anywhere else."

What is apparent is that the World Bank data miss the central issue of characterising a modern and transparent concept of poverty. The new purchasing parity indexes do not introduce any improvement in tracking the dimension of poverty over time and they are inadequate at analysing its likely determinants. Sanjay Reddy of Columbia University argues that the same two issues with the data that undermined the Bank's previous estimates are still problematic. "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. 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."

Reddy also highlights an additional problem: "Even if the latest PPPs present a better picture of relative proces in 2005, that does not make them a better basis to judge poverty across countries in the previous years." This is because national consumer price indices, used to identify the local equivalent of the international poverty line in years other than the base year, are based on wholly different baskets of goods than the PPPs. Using national consumer price indexes to recalculate the local equivalent international poverty line back to 1981 also gives rise to enormous issues of comparability among countries. Reddy concludes: "The Bank's declarations mask the fact that it has been building castles in the sand."

Inequality, both nationally and internationally, is as important as absolute poverty, some argue. Raúl Mauro of NGO Latindadd posits that the new poverty estimates also mean that inequality has increased, but the Bank has not yet dared to assess the evidence. The central problem is that the relationship between determinants of poverty and outcomes are likely to vary across the units being aggregated at the national and international level, inflation included.

Debraj Ray defines the poverty line as "the minimum level of acceptable economic participation in a given society at a given point in time." To track and fight poverty, we should focus on all its likely determinants setting aside triumphant declaration on poverty successes. The reality on the ground is all but comforting.

Related articles

• World Bank and poverty debates (II): Poverty reduction claims vindicated? News|Bretton Woods Project|17 June 2008|update 61|url

  Two new World Bank working papers have rekindled the debate over how to count the poor, with the Bank asserting that even more people have been brought out of poverty in China than had previously been estimated. read article...

• New figures cast shadow over Bank poverty reduction claims News|Bretton Woods Project|1 February 2008|update 59|url

  Preliminary recalculations of global economic output excluding differences in domestic prices and currencies, released by the World Bank in mid-December, may undermine the much-trumpeted claims that globalisation has reduced the number of people living in extreme poverty. read article...

Related resources

• The developing world is poorer than we thought, but no less successful in the fight against poverty Report|World Bank|1 August 2008|Web page|URL
• The World Bank's new poverty estimates: digging deeper into a hole by Sanjay Reddy Briefing|Socialanalysis|26 August 2008|Web page|URL
• World Bank new poverty estimates: what about inequality? by Raúl Mauro Comment|Choike|17 September 2008|Web page|URL

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