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World Bank new poverty estimates: more confusing than ever

24 September 2008

At the end of August the World Bank published a report with the new count of how many people live in extreme poverty. The new figures fuelled the ongoing debate on poverty estimates. Researchers and academics have long argued about how many poor people there are, how poor they actually are and how we should measure the uncomfortable characteristics that define them. The report’s conclusion is clear-cut: there are some 400,000 more people living in poverty than was previously thought to be the case. But not to fear, as argued by Duncan Green of Eurodad member group Oxfam GB, “no-one on the ground will feel any more poor as a result of this statistical revision”.

The last work by World Bank economists Ravallion and Chen, titled The developing world is poorer than we thought, but no less successful in the fight against poverty, gives away its conclusions. The statistical exercise was prompted by the release of new data on domestic prices across the world and thus new purchasing power parity indexes. The new poverty snapshot also took into account that Bank researchers adjusted the international poverty line in May, dropping the $1.08 per day at 1993 prices for the new line of $1.25 at 2005 prices.

According to the new paper, the numbers of extreme poor have mushroomed from less than 1 billion on the old estimates to 1.4 billion people today. The researchers also used the new data to re-estimate poverty in the past, advocating that poverty still declined as much as was previously argued. However, the study itself suggests that with the new poverty line at $1.25 the number of poor people has decreased in absolute terms by 27% between 1981 and 2005 while the same estimate using the old set of data showed a bigger decrease of 37%. In contrast, the rate of proportional decrease (ie. taking into account the population growth from 1981 to 2005) is similar to what previously thought and publicised to the world. Lastly, according to these figures, the number of people living with the equivalent of less that $2.50 would have increased over time by roughly 15%. Even more disappointing is the fact that the extent of poverty in Africa has increased constantly overtime in absolute and relative terms.

In line with the report, most of the decline in poverty numbers is to be found in East Asia and especially in China. In other regions the picture that arises from the new estimates is far from the optimistic one that the title of the report would have us believe. The reality, as recently also declared by a UN report, is that in most developing regions the number of poor is rising and in Sub Saharian Africa “the depth of poverty (...) is lower than anywhere else.”

The World Bank data fail to set out a convincing, 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. Moreover, as clarified by economics professor Sanjay Reddy in a recent article there is no basis to affirm that the new relative prices employed by the Bank build poverty estimates which are ‘better’, despite the Bank’s rhetoric to this effect. Rather, Reddy says: “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”, concludes the economist.

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, leaving aside the fact that using national consumer price indexes to recalculate the local equivalent international poverty line back to 1981 gives rise to enormous problems of comparability among countries.

What then? Debraj Ray, another US-based economics professor, defines the poverty line as “the minimum level of acceptable economic participation in a given society at a given point in time”. We would prefer to stick to this definition and apply it seriously to the local and national contexts so that poverty could be effectively tracked, studied and fought. We would prefer to set aside triumphant declaration on poverty reduction successes, since the reality is all but comforting.

Related links:

http://econ.worldbank.org/WBSITE/EXTERNAL/EXTDEC/EXTRESEARCH/0,,contentMDK:21882162~pagePK:64165401~piPK:64165026~theSitePK:469382,00.html

http://www.un.org/spanish/millenniumgoals/pdf/MDG_Report_2008_Addendum.pdf