On the poverty line

On the poverty line
May 22nd 2008
From The Economist print edition
http://www.economist.com/finance/economicsfocus/displaystory.cfm?story_id=11409401&CFID=8125392&CFTOKEN=97089615

Has “a dollar a day” had its day?


IN DECEMBER 2007 the World Bank unveiled the results of the biggest exercise in window shopping in history. Scouts in 146 countries scoured stalls, supermarkets and mail-order catalogues, recording the price of more than 1,000 items, from 500-gram packets of durum spaghetti to low-heeled ladies' shoes.

This vast enterprise enabled the bank to compare the purchasing power of many countries in 2005. It uncovered some statistical surprises. Prices in China, for example, were much higher than earlier estimates had indicated, which meant the Chinese income in 2005 of 18.4 trillion yuan ($2.2 trillion at then-market exchange rates) could buy less than previously thought. At a stroke, the Chinese economy shrank, in real terms, by 40%.

Since then, many scholars have wondered what this economic demotion means for the bank's global poverty counts. It famously draws the poverty line at “a dollar a day”, or more precisely $1.08 at 1993 purchasing-power parity (PPP). In other words, a person is poor if they consume less than an American spending $1.08 per day in 1993. By this yardstick 969m people suffered from absolute poverty in 2004, a drop of over 270m since 1990. The world owed this progress largely to China, where poverty fell by almost 250m from 1990 to 2004.

But if the Chinese economy was 40% smaller than previously thought, surely its poverty count must be correspondingly higher. Surjit Bhalla, of Oxus Investments, speculated that China's toll would increase by more than 300m. He mischievously accused the bank's number-crunchers of conspiring to lift the poverty count so as to keep their employer in business beyond its natural life.

Give a quarter, take a quarter

The dollar-a-day definition of global destitution made its debut in the bank's 1990 World Development Report. It was largely the discovery of Martin Ravallion, a researcher at the bank, and two co-authors, who noticed that the national poverty lines of half-a-dozen developing countries clustered around that amount. In two working papers* published this week, Mr Ravallion and two colleagues, Shaohua Chen and Prem Sangraula, revisit the dollar-a-day line in light of the bank's new estimates of purchasing power. They also provide a new count of China's poor.

Thanks to American inflation, $1.08 in 1993 was worth about $1.45 in 2005 money. In principle, the researchers could count the number of people living on less than this amount, converted into local money using the bank's new PPP rates. But $1.45 a day strikes the authors as a bit high. Rather than update their poverty line, they propose to abandon it. It is time, they say, to return to first principles, repeating the exercise Mr Ravallion performed almost two decades ago, using the better, more abundant data available now.

They gather 75 national poverty lines, ranging from Senegal's severe $0.63 a day to Uruguay's more generous measure of just over $9. From this collection, they pick the 15 lowest (Nepal, Tajikistan and 13 sub-Saharan countries) and split the difference between them. The result is a new international poverty line of $1.25 a day.

Why those 15? The answer is philosophical, as well as practical. In setting their poverty lines, most developing countries aim to count people who are poor in an absolute sense. The line is supposed to mark the minimum a person needs to feed, clothe and shelter himself. In Zambia, say, a poor person is defined as someone who cannot afford to buy at least two to three plates of nshima (a kind of porridge), a sweet potato, a few spoonfuls of oil, a handful of groundnuts and a couple of teaspoons of sugar each day, plus a banana and a chicken twice a week.

But even in quite poor countries, a different concept of poverty also seems to creep in, the authors argue. It begins to matter whether a person is poor relative to his countrymen; whether he can appear in public without shame, as Adam Smith put it.

This notion of relative deprivation seems to carry weight in countries once they grow past a consumption of $1.95 per person a day. Beyond this threshold, a country that is $1 richer will tend to have a poverty line that is $0.33 higher (see chart). The authors thus base their absolute poverty line on the 15 countries in their sample below this threshold.

How many people in the world are poor by this new definition? The authors are not yet ready to say. But they have taken another look at China. By their new standard, they find that 204m Chinese people were poor in 2005, about 130m more than previously thought.

That is the bad news. The brighter news is that China's progress against poverty is no less impressive than previously advertised. By Mr Ravallion's and Ms Chen's new standard, the number of poor in China fell by almost 407m from 1990 to 2004, compared with the previous estimate of almost 250m.

China's economic co-ordinates may be different than thought, but its trajectory is much the same. And therein lies a lesson. Give or take a dime or two, it matters little where a poverty line is drawn. Like a line in the sand, an absolute poverty standard shows whether the economic tide is moving in or out. It does not matter too much where on the beach it is drawn.

For practical purposes, policymakers will always care more about their own national poverty lines than the bank's global standard. The dollar-a-day line is more of a campaigning tool than a guide to policy. And as a slogan, $1.25 just doesn't have the same ring to it. A better option might be to reset the poverty line at $1 in 2005 PPP, which would line up reasonably well with at least ten countries in the authors' sample. In adding a quarter to the dollar-a-day poverty line, the researchers may cut its popular appeal by half.