International poverty threshold: a reality check
By Ali Shan Azhar
Authentic cross-country comparisons of poverty rates cannot be made on the basis of national poverty lines with disparate basis. To provide an international standard for world poverty, the World Bank in 1990 introduced a common international poverty threshold of $1 perday, measured in 1985 purchasing power parity (PPP) exchange rates. The threshold is based on national poverty lines from a sample of developing countries. The implication is that after adjusting for cost of living differences, $1 a day is the average minimum amount required for subsistence in the developing world.
The $1-a-day approach for estimating global poverty belong to the money-metric family. The money-metric approach does not define the international poverty line in terms of any underlying concept of human requirements. The common international standard is, instead, translated into the local currency units of a particular country and year.
The resulting local poverty lines can then be compared with measures of income or consumption from household surveys to determine whether an individuals command over resources falls short of the poverty line, and up to what extent. Finally, estimates of the number of the poor are compared across countries as well as aggregated to determine how many poor in each region and in the world.
The overall approach to the counting of global poverty has essentially remained the same over the years, though there have been some refinements in the methods along with efforts for improving quantity and quality of the primary data used for calculating global poverty. In the late 1990s, the World Bank released purchasing power parity (PPP) exchange rates based on prices and consumption baskets for 1993 having much broader country coverage than the previous PPP rates. In effect, this amounted to the selection of a new international yardstick equivalent to $1.08 a day at 1993 international prices.
Millennium Development Goals (MDGs): The $1 poverty gauge immediately grabbed attention and has since been employed in a range of policy analyses. It has frequently played a key role in determining resource allocation priorities, and in assessing the poverty reducing impact of policies and programmes. The concept gained prominence in September 2000, when the United Nations Millennium Summit adopted it as the benchmark for monitoring progress in reducing extreme poverty around the world. The very first goal of MDG is to eradicate extreme poverty and hunger. For the purpose, it sets a target of halving by 2015 the proportion of people whose income is less than $1 a day. Further, the goal calls for halving the proportion of people who suffer from hunger.
Protagonists will argue that the $1-a-day poverty standard has a good deal to commend it:
The threshold of $1-per-day has a great intuitive appeal, even if these are not real dollars. Choosing any other dollar amount or fixing a threshold in terms of any other currency clearly would not have attracted the same interest.
The international poverty line corresponds, at least approximately, to the national poverty lines of a number of the poorest countries. Hence, its adoption as a benchmark for determining who is poor in the world does make sense. .
The ultimate purpose of the $1-a-day poverty line is simply to provide a reasonably consistent assessment of progress against absolute income poverty in the developing world. For a global poverty count, the overriding concern is that two people with the same standard of living, measured by their command over commodities, be treated the same way no matter where they live. The poverty line is not intended for use in policy discussions at the country level and should, therefore, not be evaluated in that context. It is an explicitly international poverty benchmark which applies the same standard to all countries, ignoring perceptions of relative deprivation.
Reliability: How reliable and how legitimate is the use of the $1 a day poverty line for monitoring global progress towards the MDG? The issue of whether the poverty goal will be met is interwoven with a debate on the methodology of poverty measurement.
Money-metric approach: The $1-a-day poverty line is riddled with the typical shortcomings that every money-metric approach is. The challenge gets magnified when the aim is to set a yardstick that has universal validity.
Foremost, the $1 per day international poverty line is arbitrary and is not defined meaningfully enough. It is unrelated to any clear conception of international poverty. Poverty lines in local currency in use in 1985 were presumably converted to dollars using the PPP exchange rate then available for each country. Since they were found to cluster around $1 a day in constant 1985 PPP dollars, this threshold was seen as representative of the poverty lines then in use.
Even assuming that local currency poverty lines in 1985 represented the value of a national poverty bundle, it cannot be claimed that the $1 a day international standard in 1985 PPP dollars was representative of national poverty lines, even in that base year. Resultantly, the concept does not exactly lend itself to proper identification of the poor and/or to policy appraisal. It is, hence, important to determine the sensitivity of poverty estimates to the underlying definitions, choices and assumptions behind the statistics and to explore alternative poverty lines and measures.
Another critical query is: Does consumption expenditure at a level deemed equivalent to the international poverty line suffice for human beings to acquire resources they need to achieve elementary requirements? The international poverty line is not adequately anchored in any specification of the real requirements of human beings. This problem derives from the fact that in absence of an underlying notion of human requirements, there is no coherent way of translating the international poverty line across countries and over a time. In fact, it is not possible to identify the equivalent of the international poverty line in local currency units without some conception of what these units are intended to achieve. Unfortunately, such a conception is precisely what the money-metric approach lacks relying in this case on PPP conversion factors. Hence, the $1per day poverty line does not reflect the cost of meeting essential human requirements in any country.
PPP indices: Global poverty counts depend largely on the accuracy of both --PPP exchange rates and national consumer price indices. It employs a concept of purchasing power equivalence that is neither well-defined nor appropriate for poverty assessment. Foremost, the PPP exchange rates are not designed for international poverty comparisons but rather for comparing aggregates from national accounts. Naturally, the reliance on the PPPs for computation of the $1 a day poverty line gives rise to a number of complications:
Because PPP exchange rates are price index numbers, they suffer from problems that are common to all price indexes, and therefore inherent in any attempt to convert a common international poverty standard into local currencies. There are no general solutions to conceptual problems of constructing PPP price indexes. Those who construct them know this, and make compromises at least some of which are undesirable.
The national poverty lines compiled for the purpose of determining the original international poverty standard were constructed around the mid-1980s. Many countries have revised them; some have even changed the methodology for their calculation. An effort must, therefore, be made to improve the database and methodology for estimating the number of the poor around the world.
PPP rates are based on prices and weights of commodities that are not representative of consumption baskets of the poor. PPP prices are typically based on national average consumption patterns, which often differ from the consumption patterns in the neighbourhood of the poverty line. Thus, the consumption bundles of the poor are not the same as the average consumption bundle, and price movements in the latter can be different from price movements in the former, for example if the relative price of food increases.
The existing PPPs are influenced by information about prices and quantities of commodities consumed disproportionately by the non-poor, both within the same country and in other countries. When the relative price of such consumption items is low in poor countries, one might erroneously conclude that the cost of avoiding poverty is lower than it really is. The use of PPPs based on general consumption to convert international poverty lines has, thus, led to lower local currency poverty lines than would have resulted from using more appropriate PPPs. It has been estimated that the cost of general consumption in poor countries is about 30--40 per cent lower than the cost of food.
Existing methods for calculating the PPP conversion factors between any pair of countries require aggregating information from a wide range of countries on prices for a wide range of commodities. As a result, PPPs are influenced by information about prices and quantities of commodities consumed in third countries. Sensitivity to third country information will imply that a poverty line in a country will fluctuate simply because of changes in prices in a third country, even though nothing has changed either in the country in which poverty is being measured or in the base country. How serious the impact of such country irrelevance is in practice is difficult to judge.
Poverty estimates for a country for a specific period can change dramatically merely by shifting the base year of the international poverty line. National poverty headcounts and hence also the geographical distribution of poverty are greatly influenced by the choice of base year. This is also true of poverty comparisons across countries or regions. These variations can go well beyond what one would normally expect from index number problems. Such problems are inherent to the money-metric approach and to the use of existing PPPs. They arise because the data used for constructing PPPs reflect the structure of the world economy in a given base year.
The present judgments concerning the extent of poverty in different countries and regions thus depend substantially on arbitrary factors. And although it is hard to predict what might happen with a new round of PPP numbersand it is possible that they will be much more stable from now onit is surely undesirable to measure world poverty with methods that are so unstable and unreliable. There exist substantial uncertainties, which make it effectively impossible to track the depth and incidence of poverty over a time. Assertions of the existence of poverty trends derived from methods that rely on these PPPs are therefore highly questionable.
An important issue is that the poor tend to pay different prices for the goods they consume than their non-poor compatriots. The difference may exist because of where the poor buy (for example in semi peripheral and rural areas), because of the quantities in which they buy (typically smaller than for the non-poor), or because of who they are. There is some evidence that due to social marginalisation the poor have to pay higher unit prices for many goods and services. The use of PPPs based on prices observed to be paid by the non-poor may then be misleading. The ideal PPP would not only use weights that are appropriate for poor people, but would collect prices that are appropriate for them. Statistical offices rarely collect different prices for different people, but work on the premise that all consumers face the same prices.
The PPP conversions do not take into account the considerable price differences between the urban and rural areas. Such variations exist in virtually every country/region.
National price indexes are computed on a plutocratic basis, with weights that are proportional to aggregate expenditures. As a result, the national price index tends to represent relatively well-off households. · The instability of actual PPPs from one revision to the next suggests that commodity price instability may be playing a role. Some foodstuffs that are important to the poor, such as rice, wheat, or sugar, have active world markets, in which prices are noticeably volatile. The severity of this problem depends on how the local price data is collected, and the extent to which the prices used to construct the benchmarks are affected by fluctuations in world prices.
It is claimed that the new $1.08 a day line in 1993 PPP prices has a similar purchasing power to the $1 a day line in 1985 PPP prices, in terms of the command over domestic goods. However, as PPP units in different years are non-comparable, this statement has no meaning. The changing structure of global and national economies over a time gives rise to substantial changes in PPPs. It is difficult to adjudicate among inter-country comparisons that invoke PPPs from different base years.
The impact of the problems is compounded by weaknesses in the data used to calculate PPPs. First, the estimates are based on data that is infected with measurement errors. For this reason, final totals based on these data will also be similarly infected. Countries that participate in price surveys differ greatly in the quality of the price observations collected.
Summing up, sufficient attention has not been paid to improving the database and methodology for constructing a better and more accurate international poverty threshold. The origins of the dollar a day poverty line lack a solid analytical basis, since an internationally accepted poverty bundle does not exist. It makes no sense to simply convert $1 a day to local currency values using PPP exchange rates that reflect world market price changes with no relevance to the poor. Revisions of the PPP rates have served to wreak further havoc with the poverty counts because of changes in the base year. The PPPs currently used to covert the $1 a day lines into local currencies suffer from all the generic problems of price indexes.
All in all, the global poverty counts are in need of serious adjustment if they are to reflect more accurately the situation of the worlds poorest in the new millennium. As things stand, the decreasing trends of global income poverty have no evidential justification in light of the uncertainties associated with the present and past estimates of its extent. In particular, monitoring of world poverty, necessary to assess whether the MDGs being achieved, cannot reliably be undertaken presently.
http://www.dawn.com/2007/07/23/ebr11.htm
