In early 2012, outgoing World Bank President Robert Zoellick announced that the Millennium Development Goal of halving the global poverty rate relative to its 1990 level had been achieved in 2010 – five years ahead of schedule.
However, many analysts have challenged estimates that rely on the World Bank’s current poverty line, raised in 2008 from $1 to $1.25 per day, in purchasing power parity (PPP) terms.
Critics argue that, for methodological reasons, the PPP-based poverty line misrepresents the prevalence of poverty worldwide. For example, the three rounds of the World Bank’s International Comparison Programme that have been conducted so far have each defined the poverty line differently, underscoring the weakness of the current measure. In fact, taking into account inflation in the US, the poverty line should have been raised to $1.45 per day in 2005.
Improving global poverty estimates requires overcoming three major problems: insufficient survey data, flawed survey execution, and faulty PPP conversions. Unfortunately, the World Bank’s approach has evaded these issues or addressed them inadequately.
First, many countries lack survey data showing how income and consumption are distributed. The World Bank assumes that the poverty rate of any country without such data matches the region’s average. But this approach has led to North Korea being assigned essentially the same poverty rate as China, even though the former regularly receives food aid from the latter.
Second, the World Bank accepts survey data uncritically – even when it conflicts with data from other sources. For example, World Bank survey data suggest that India’s per capita household expenditure has grown by only 1.5 per cent annually since the early 1990’s, implying that the average Indian spent $720 (about Sh60,123) in 2010. But national-income-accounts data show a 4.5 per cent annual rise, on average, over the last two decades, translating into per capita expenditure of $1,673 (about Sh139,697) in 2010 – 2.5 times higher than the Bank’s estimate.
Likewise, the World Bank survey data estimate that the Indian middle class comprises roughly 90 million people, despite over 900 million cell-phone subscribers and 40 million cars. This reflects significant discrepancies.
The third major challenge is using PPP estimates, measured in national currencies, to convert survey data into global poverty estimates that account for cost-of-living differences between countries.
Given that the conversions that the World Bank currently uses are based on a global exercise conducted for 2005, they fail to account for recent factors that are affecting the poor, such as higher food prices.
Furthermore, PPP conversions have little significance for some countries, say China. Rather than permit price surveys in a random sample of locations (required for accuracy), China restricted data collection to a few cities.
The resulting data showed Chinese prices to be 40 per cent higher than previously thought; Chinese living standards were then revised downward by roughly the same proportion.
Flawed system
If taken at face value, the survey data on prices, together with China’s growth rates, would suggest that China was almost as poor in 1981 as the world’s poorest country today, with average personal consumption below the current level of Liberia – a country which China provides significant aid.
With such a flawed system shaping the world’s understanding of poverty, declarations of success or failure carry little meaning. An improved poverty indicator – one that addresses, rather than avoids, the three major problems plaguing global estimates – is urgently needed.
Jomo Kwame Sundaram is assistant director-general at the economic and social development department of the United Nations Food and Agriculture Organisation in Rome.